House of Commons Defence Committee Defence Procurement
Sixth Report of Session 2003–04
Volume II
Oral and written evidence
Ordered by The House of Commons to be printed 14 July 2004
HC 572-II Published on Wednesday 28 July 2004 by authority of the House of Commons London: The Stationery Office Limited £16.50
The Defence Committee
The Defence Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Ministry of Defence and its associated public bodies.
Current membership
Mr Bruce George MP (Labour, Walsall South) (Chairman) Mr Crispin Blunt MP (Conservative, Reigate) Mr James Cran MP (Conservative, Beverley and Holderness) Mr David Crausby MP (Labour, Bolton North East) Mike Gapes MP (Labour, Ilford South) Mr Mike Hancock CBE MP (Liberal Democrat, Portsmouth South) Dai Havard MP (Labour, Merthyr Tydfil and Rhymney) Mr Kevan Jones MP (Labour, North Durham) Mr Frank Roy MP (Labour, Motherwell and Wishaw) Rachel Squire MP (Labour, Dunfermline West) Mr Peter Viggers MP (Conservative, Gosport)
Powers
The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.
Publication
The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at
www.parliament.uk/parliamentary_committees/defence_committee.cfm
A list of Reports of the Committee in the present Parliament is at the back of this volume.
Committee staff
The current staff of the Committee are Mark Hutton (Clerk), Steven Mark (Second Clerk), Ian Rogers (Audit Adviser), Dr John Gearson (Committee Specialist), Brenda Brevitt (Inquiry Manager), Lis McCracken (Committee Assistant), Sheryl Dinsdale (Secretary) and James McQuade (Senior Office Clerk).
Contacts
All correspondence should be addressed to the Clerks of the Defence Committee, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 5745; the Committee’s email address is [email protected]. Media enquiries should be addressed to Adele Brown on 020 7219 0724.
Defence Procurement
Witnesses
Volume II
Wednesday 5 May 2004 Page
Sir Richard Evans, Chairman, BAE Systems, and Chairman, Defence Industries Council, Mr Nick Prest, Chairman and Chief Executive, Alvis, and Vice Chairman, Defence Industries Council, Mr John Howe, Vice Chairman, Thales UK, and Mr Simon Frost, Chief Executive, Claverham Ev 1
Wednesday 12 May 2004
Sir Peter Spencer KCB, Chief of Defence Procurement, Ministry of Defence Ev 20
Wednesday 20 April 2004
Lord Bach, a Member of the House of Lords, Minister for Defence Procurement, Sir Peter Spencer KCB, Chief of Defence Procurement, and Lieutenant General Rob Fulton, Deputy Chief of Defence Staff (Equipment Capability), Ministry of Defence Ev 40
Defence Procurement
List of written evidence
Volume II
The Defence Procurement Agency Ev 65 A Stocktake of Smart Acquisition in the DPA Ev 66 Ministry of Defence Defence Industrial Policy Ev 77 Developments in Smart Acquisition Ev 77 Defence Procurement Ev 80 A400M Ev 80 Advanced Short Range Air-to-Air Missile (ASRAAM) Ev 82 Light Forces Anti-Tank Guided Weapon System (LF ATGWS) Ev 83 WAH 64 Attack Helicopter Ev 85 Type 45 Anti-Air Warfare Destroyer and PAMMS Ev 86 Meteor Ev 89 Astute Ev 91 Nimrod Maritime Reconnaissance and Attack Aircraft MK4 Ev 92 Bowman Ev 94 Typhoon Ev 95 Watchkeeper Ev 98 Future Joint Combat Aircraft (FJCA) Ev 99 Future Strategic Tanker Aircraft Ev 102 Future Rapid Effect System (FRES) Ev 103 Future Carriers (CVF) Ev 105 Defence Engineering Group Ev 108 Defence Industries Council Ev 111 Intellect Ev 115 QinetiQ Group plc Ev 118 Northern Defence Industries Ltd Ev 120 VT Group Ev 122 Humphry Crum Ewing Ev 123 Tony Purton Ev 128 Defence Manufacturers Association (DMA) Ev 129 BAE SYSTEMS Ev 130
Defence Procurement
List of unprinted written evidence
An additional paper has been received from the following organisation and has been reported to the House but to save printing costs it has not been printed. A copy has been placed in the House of Commons Library where it may be inspected by Members. Other copies are in the Record Office, House of Lords and are available to the public for inspection. Requests for inspection should be addressed to the Record Office, House of Lords, London SW1 (Tel 020 7219 3074); hours of inspection are from 9:30am to 5:00pm on Mondays to Fridays.
PIMS Associates Limited
Defence Procurement: Evidence Ev 1 Oral evidence
Taken before the Defence Committee
on Wednesday 5 May 2004
Members present
Mr Bruce George, in the Chair
Mr James Cran Mr Kevan Jones Mr David Crausby Mr Frank Roy Mike Gapes Rachel Squire Mr Mike Hancock Mr Peter Viggers Mr Dai Havard
Witnesses: Sir Richard Evans, Chairman, BAE Systems, and Chairman, Defence Industries Council, Mr Nick Prest, Chairman and Chief Executive, Alvis, and Vice Chairman, Defence Industries Council, Mr John Howe, Vice-Chairman, Thales UK, and Mr Simon Frost, Chief Executive OYcer, Claverham, examined.
Q1 Chairman: Welcome, gentlemen. There is future. Our impression is that it arose because nothing like a procurement session to draw a large ministers themselves felt that the procurement audience! Thank you very much for coming. Sir processes brought wider strategic and industrial Richard, as the doyen of the defence manufacturers issues into the equation far too late in the and as this is probably your final appearance before procurement cycle and not in a terribly joined-up us, we aVord you the privilege of introducing your way. Industry has always agreed with this viewpoint colleagues and maybe making a few introductory but it is something that Government have decided to remarks. try and change and we very much want to help and Sir Richard Evans: Simon Frost has I think been here be part of that change process. We are very happy to before; he represents our SME group and who of take any questions that you want to put to us and, if course are of huge importance to the supply chain; we are not able to give you specific answers, we will on my left is John Howe of Thales and Nick Prest certainly follow questions up and give you answers from Alvis. I think it is fair to say that we have all in due course. been engaged in the DIC for a period of time. I will make one or two opening remarks. First of all, we Q2 Chairman: I am sure that we have a lot of quite are genuinely quite grateful for the opportunity to contentious questions to ask of you. Gentlemen, the put an industry perspective on the development of Defence Industrial Policy was launched some 18 defence industrial policy and of course its months ago. In which areas do you think the policy implication for the defence procurement system has made some progress? In which areas do you which is so important to all of us. We know that you think the ideas in the policy have not made much have many questions that you want to ask on a progress? number of aspects in this complex area but, if I may, Sir Richard Evans: In fairness, I should re-emphasise I would like to draw attention to one fundamental that this policy was published only 18 months ago. I aspect of the policy before we get too absorbed with think it is a perfectly reasonable question in the detail. As the DIC’s written evidence described, hindsight for many of us to ask as to why we did not industry made a comprehensive input to the original address these issues some years earlier but hindsight policy that was announced in October 2002 and it is a pretty exact science. I think by definition there is was an input to a debate within Government started a great deal of expectation that came about when by MoD ministers and it was about a policy of the this paper was published that we quite seriously Government which aVects a range of the could and would not change things in the period of departments, not just the MoD. Thus, the policy was time over which this had been running. The things launched jointly by the Secretaries of State for that the Defence Industrial Policy paper have done Defence and Trade and Industry and subsequently today is that it has given an opportunity for the of course managed by a group of departments Government and particularly through the MoD to chaired by the Cabinet OYce. Sometimes it seems in actually enumerate what are essentially a set of discussions today as though industry asked for a strategic objectives that need to be brought into defence industrial policy when in fact we were account in the process of decision taking and, indeed engaged in the debate by government. What I really prior to decision taking, in the process of making want to point out at the start of this hearing is that recommendations for decisions, but I think, in the Defence Industrial Policy is not a policy for fairness, both we and the MoD would say that the industry’s sake but it is actually, we believe, very actual examples today of great success in this area much in the national interest. It is about the are pretty patchy. As of today, I would not want to sovereignty of the UK and it is about our economic give you any real examples of where I think we could Ev 2 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost say that things have been decided diVerently because Mr Frost: The view I would have from slightly lower of this policy. Now, of course, we are all travelling down the supply chain is really very similar. It is a in hope. We very much actually want this policy to long-term industry. We need to plan strategy for our succeed, but it is a big culture change programme businesses. No little pressure around in our and it is not just a policy, this is about getting people industrial environment, as you might imagine, and to behave and think very diVerently from the way in sector. We see customers, the Armed Services of the which they behaved and thought previously. If this UK and other countries, with a very rapidly policy is going to be eVective, we really should not be changing threat which they have to assess and having situations where secretaries of state are working together in a joint industrial policy would issuing ministerial directives to their departments in be extremely helpful to our own strategic planning. order to turn over recommendations that have been We do not need support for products that people do made. Frankly, if we get to that point—and I am not want to buy. We want to be able to develop the obviously here referring to the selection of Hawk, right products. That can only come out of a joint the RAF advanced trainer programme or re- policy, a joint strategy and common understanding equipment programme—then this policy will have of the requirements both for our Government and failed. My personal view of this—and I think it is the international defence industry. shared by some of my colleagues here—is that it is a good start but it is absolutely not going to make The Committee suspended from 4.00 p.m. to 4.23 p.m. progress until people implement it through the for a division in the House procurement process and, right now, there is insuYcient evidence to say whether or not that is being done eVectively across the board. Q3 Chairman: Sir Richard, in an article you wrote in Mr Prest: I would like to echo Dick Evans’ point December, you said, “There is much work still to be that this is a work in progress. We do not see the done to ensure it” ie the Defence Industrial Policy Defence Industry Policy as a single blueprint which “becomes a cohesive, eVective and systematic is then stuck on the wall and followed. I think it strategy for the sustainment and development of key comprises a clear recognition by Government that industrial capabilities in the UK.” Perhaps you and the defence industry is important and a clear others could comment on whether there is suYcient understanding in Government of the linkages momentum in Government and industry that this between its decisions and what happens in the work is undertaken. defence industry, that is a clear understanding in Sir Richard Evans: Perhaps I could go back to the Government of the data, the shape of the industry previous point about what are the benefits coming of and the direct impact of particular decisions. Then I the policy paper as written. In the paper we have think it comprises a series of policies or of circulated, you will find in the annexure to the paper behaviours to be followed in a number of diVerent basically a list of actions that are running that are areas, which might be in the area of acquisition, designed to address some of these issues and these which might be in the area of research and issues that are fundamental are about having a joint technology or which might be in the area of how view on what the priorities are in the context of future capability requirements are articulated but, in investment and spending, how these establish some all those areas, pursuing the set of policies which form of matrix to assess the value of what those are have defence industry eVects in mind in order that, and indeed what they should be, and of course how consistent with meeting the military’s requirements we deal with the consequences of that because I on a value-for-money basis, then the money is spent think it is very clear to all of us on the industrial side in ways which produce the results for the Defence at the moment that the budget allocations that are Industry Policy or where there is any conflict made today are not suYcient to sustain the existing between value-for-money and meeting the objectives levels of capability that we have and already it is and the consequent eVects on industry, that that becoming increasingly apparent to us that the gap in trade-oV is clearly and explicitly recognised and technology levels between the UK and the Government can make informed decisions about it. Americans is growing very, very rapidly. That As Dick said, it is a process, it is a series of clearly says to us that we have to address the issue behaviours and it will take a while to unfold. and prioritise the requirement and we cannot do that Mr Howe: I think there is one positive thing which is until there is a completely integrated dialogue that I am sure there is actually more dialogue starting with the user, which is the military between industry and Government on these sorts of themselves, but working through the whole of the issues than there was a few years ago, but I guess scientific community and with the industrial there is still some way to go in one particular area community. I think that all of us on the industrial which is clarity about what kinds of industrial side recognise that the results of that are going to be capabilities and indeed what kinds of technologies pretty damn painful. It is, by definition, going to are judged to be of crucial strategic importance in require us to actually downsize substantially UK the long term. What kind of industry does the UK capabilities to meet aVordability and, if you look at think it is important to have in the future? What kind the work streams that are beginning to emerge out of of capabilities is it important to retain for strategic the Defence Industrial Policy paper, these work reasons? That is an area where I think we need to go streams are very much designed to address some of on working to achieve more clarity in order that we these particular issues. It is then clearly a matter for understand clearly what the rules are in that respect industry to decide where it is going to invest its when competitions are judged. future money, but we need to have some clear Defence Procurement: Evidence Ev 3
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost indications as to what the long-term requirements over and to take you out of the market and so are particularly in terms of where we are going to depriving us of the very asset you were talking invest R&T for the future and we need that a lot about? more quickly identifying than appears to be the case Sir Richard Evans: It is and I do not think we should at the moment. have any illusions. The great threat to the technological base here in foreign terms is coming from the Americans because they are investing such Q4 Mr Hancock: We were told last year that the huge amounts of money into R&T and it is why a lot defence industry would be going through a process of our companies are actually investing of ongoing restructure and then re-organisation. shareholders’ funds today, not here in the UK but Presumably that is still the case and, if so, where do actually in America buying American assets. If this you envisage this going over the foreseeable future? process continues without the actions that we have Sir Richard Evans: I think we can only say to you described or outlined or provided for in this that, although there has been a huge amount of industrial policy paper, if we actually do not do that, consolidation that has taken place already, it is not the UK is simply going to become the American going to stop where it is. Even in America, I suspect metal basher. There will be no intellectual capability that there is another round of consolidation to take here in the UK in terms of the very high value-added place. I think that here in the UK, from a UK content of programmes that this country has built up Limited point of view, our interest is to ensure that, over so many years and that is why the JSF decision where consolidation takes place and particularly was such a massive disappointment for us. That where consolidation entails downsizing, giving up decision—and we should have no illusions—took us skill sets and people having to move out of the out in the UK from the manned military business industry, particularly in those areas, we clearly do it and we will live to regret it, I can assure you. in a planned way understanding that actually what we are doing in terms of maintaining a skilled Q6 Mr Hancock: So, BAE Systems will resist selling capability is directed to what it is the military of this part of their operation to the Americans and the country actually want for the future. With the best marine division will stay in British hands? will in the world, we cannot ourselves look into a Sir Richard Evans: No, we certainly will not. If in crystal ball and do that uniquely on our own. We can fact we are not able to deploy shareholders’ funds in only do that in conjunction with the end customer. this country in support of the current investments That is why, not just in the context of the Defence that we have here and they are not producing a Industrial Policy but also in some of the principles of satisfactory return, the existing management of BAE Smart Acquisition, it is so important that the Systems will have to take that money to somewhere military and industry come together much, much else where it can get that return and, if the earlier than they have ever done historically to management does not do it, the shareholders will put actually try and identify what those key a new bunch of managers in who will do it. requirements are. If we do not do that, what will actually happen is that, by default, industry will Q7 Mr Hancock: So, BAE Systems are not too simply downsize, it will consolidate, and we are interested in the national interest then. going to wake up one morning and we will literally Sir Richard Evans: Of course we are interested in the find key skills missing. A great example of this is the national interest. We are interested in the national sad history of the Astute Submarines where, at the interest for two reasons. One is that we have a huge time no doubt for very understandable reasons, the number of highly skilled people whom we want to Ministry of Defence, having elected to close down protect and we believe that they are an important the Royal Naval Architects OYce—it was done in a national asset and actually it requires two to make it very orderly fashion—then we let a contract for a work. I do not want to start running some of these new requirement by way of a nuclear submarine and, assets down if we are going to find ourselves having lo and behold, the only people who had ever a requirement for them in due course. We have to designed and actually passed into production a have a sensibly planned load in our businesses. nuclear submarine were not there any more. I am Businesses cannot work on feast and famine. We really saying that, in the context of the work that we have to have a steady forward-projected workload need to do, we really have to prevent that happening that makes sense. again and, recognising that budgets are not infinite and we have to concentrate those budgets on things Q8 Mr Hancock: EVectively, what you are saying is that are really important, there is no point in either that the future of BAE Systems marine division is side doing that independently, we have to do it dependent on the MoD buying from them rather together, we have to share the objectives and we then than them trying to get other work from elsewhere. have to jointly find how we resource those Sir Richard Evans: No, absolutely not at all. It is objectives. primarily dependent upon the MoD in the context of the R&T investments that are required in order to sustain future developments in that part of the Q5 Mr Hancock: Does that then lead you to believe business. This is a business that, for 70 years, has that the real predator in this would be the United been completely neglected in the context of States defence industries who will look to develop investment. When we were buying GEC Marconi, British businesses as opportunities for them to take some of you may recall that there was a huge Ev 4 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost problem with a company called Kvaerner who that we stay in the premier league in those areas. It owned one of the yards in the Clyde and I was called is like a pregnancy test; there is no half-pregnancy; in to Number 10 to give a view on how we may we are either there and successful or we are dying. manage the consequences of this because there was a serious danger of this yard being closed and I made Q10 Mr Hancock: I think that you need to give your the position perfectly clear then. There was at that colleagues a chance to defend their position rather time and there still is too much naval shipbuilding than just BAE Systems. capacity in this country. We had not invested a single Sir Richard Evans: You asked me about the damn penny in any of these facilities for 70 years and shipyards. the reason for that was perfectly simple. It was for political reasons. The way in which shipbuilding was Q11 Mr Hancock: I will come back to your point of handed out was that a ship went to this yard or it view in a minute as I would like to hear from the went to that yard or to another yard in order to deal others. with political expediencies. There was no long-term Mr Howe: I think an important point about the planning and therefore no investment committee of defence industry is that it is now increasingly any board in the country was likely to be willing to international and if companies like the one I work invest in the facilities, which is exactly what for are going to invest in the UK, as my company has happened. I made my position perfectly clear at the very substantially in the last ten years, then we need time and it was that, if the Government wished us to to be sure that there are conditions for doing good be, might I use the word, the champion of the naval business here and a joined-up view of what the shipbuilding business in this country, to do that we national priorities are for industrial capability and need to have a partnership with HMG and that what the national priorities are for research and partnership requires HMG to prepare to commit technology investment. These are conditions that long term to us for its requirements and, on that are important and should be met as a result of this basis, I then have a case to take to my board for Defence Industrial Policy. investment in that business. We are now piling investment into that business. Frankly, if you had gone to any of these yards when we acquired them, Q12 Mr Hancock: Are you getting a clear message? you would have been appalled and I personally felt Mr Howe: We are working on it. It is a very completely disgraced by setting foot in these important part of the dialogue that we have under facilities. How on earth people could have been the Defence Industrial Policy that we shall get that expected to work and produce high quality clarity. workmanship out of them was just unimaginable. If Mr Frost: Can I come back to the general you go round some of these facilities today—and we consolidation subject. There are two eVects lower have not finished it by any means—you will see a down the supply chain. The first one is your very diVerent picture. I want there to be a long-term traditional customers cease to be in the same position in naval shipbuilding for us in the UK and, company because, as companies get more globally if we get this business right—and I am talking naval orientated and larger, you often end up supplying to shipbuilding and not commercial shipbuilding— a subdivision of those companies or indeed to a third there is no reason at all why we cannot go back out party who is doing the integration on a national and rebuild an export business that this country once scale. That is a huge change for very, very many UK had and then lost. There is no reason why we cannot defence companies. So, they have to learn how to do that but to do it requires stability, it needs long- handle and how to liaise with new customers and term commitment of investment and it requires a learn what drives them and those new customers are partnership to do it and, without that, actually, the not always UK businesses, they can often be foreign- business will not survive. At the same time, we have based businesses. That is one factor. The other to face up to taking more capacity out of the market factor is that, at the supply chain level, we all need to here in the UK. be bigger and healthier to satisfy that need. So, there is a lot of consolidation needed lower down the industry. In the case of one of the companies that I Q9 Mr Hancock: Are you fairly pessimistic about am involved with, we sold to United Technologies, the future of the UK defence industries? the Americans, and that turned out to be a Sir Richard Evans: Yes, I am because, at the present interesting process where a lot of new culture had to time, the R&T tap has virtually dried up. Decisions be learned and in fact it did turn out to be a two-way were taken 15/20 years ago in the expediency of street: they bought us because we had flight control meeting budget requirements under which the technology which in fact they did not, particularly traditional sources of R&T funding in defence relating to helicopters, and at the same time it gave became very, very much depleted. It was at a time us some access—and this is a company with 400 when the Americans were very much increasing their people in the south west of England—to levels of R&T. I am not suggesting that the UK programmes that we did not realistically have a should be attempting to compete with the chance of bidding on before that. However, that Americans in terms of expenditure and defence, but technology came out of the base that had been what I am saying is that we should together, as UK developed over the years working primarily on UK Limited, identify those areas that are strategically programmes. So, there is not a diVerence of opinion important for us in the long term and together here, it just has slightly diVerent consequences concentrate our joint resources into making sure running down the supply chain. Defence Procurement: Evidence Ev 5
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost
Mr Prest: Picking up on the point of consolidation, I business. My concern about this issue is that I think think you need to look at it from a couple of diVerent that if we just leave this completely to market forces points of view. Consolidation from one dimension without actually giving any thought to future means changes of ownership that are going on potential requirements which are national interest within the international defence industry and I echo issues, what we will see is continuing decline in mine John Howe’s point that this is now an international and other companies’ interests in the UK markets industry. As Alvis, we bought businesses in Sweden and I think that would be a sad day for the UK. and in South Africa as extensions of our base business here in the UK. We have been welcomed as investors in those countries and we have been able to Q14 Mr Hancock: Do you think that the MoD are operate the businesses in those markets in ways actually equipping themselves for the change that is which have satisfied local customers. There is now a going to be needed to take account of consolidations further development in that General Dynamics has you have talked about in the way that your reliance made an oVer for Alvis and, if that goes through, it on the MoD is diminishing but their reliance on you, would result in Alvis becoming a subsidiary of sadly, is still as great? So, what do you think they General Dynamics. The reason that these need to do to reflect the changes in the restructuring developments are taking place is because companies that takes place? believe that a bigger international spread in their Mr Prest: MoD has many, many talented people in business will give them access to the wider range of it. But I think it has, in recent years in the area of market and will enable them to draw on a wider procurement and defence research, been driven to a range of sources of research and technology both in considerable extent by events, by budgetary terms of the expertise of their employees and sources constraints and, in some cases, by shorter-term of government funding coming internationally into considerations. I think it has found it harder to take the defence business and, as a general process, I a strategic and holistic view and perhaps a longer- think we have to regard that as (a) inevitable and (b) term view, in some cases, of how its interests might healthy and, in the longer run, this is better for both best be served and I think we should be clear about customers and employees of companies to be that. I do not think anyone here around this table is organised on an eYcient basis. The other aspect of sitting here saying that defence is an industry which consolidation that has been referred to has been should be subsidised. That is absolutely not the reductions in capacity and that has been another question. The question is that the nation as a whole driver of consolidation in the industry. In my needs to have a clear understanding of actually what particular sector, which is the production of it wants the defence industry for and then to follow V armoured vehicles, ten years ago there were four policies to that e ect. Nobody here is advancing a armoured vehicle factories in the UK and there is policy of inventing defence equipment programmes now one and a bit, and that has been a direct result of in order to maintain jobs that would otherwise major reductions in the market, both nationally and disappear. Certainly speaking for myself, I am not. internationally. I make that point simply to say that, So, it is a question of coming to the issues that we in the end, the sustainment of these businesses have discussed. The MoD has to have a clear depends on there being a viable market and, in the understanding of international trends that are context of UK businesses, the domestic market is taking place and a very clear understanding of what V extremely important, not just for its own volumes it can a ord. That may seem a statement of the but also as a source of R&D and as an anchor obvious but I do not think it is as obvious as all that. customer and a reference point around which Some of the problems in the equipment programme Y exports can be built and that remains the come from there being insu cient realisation of fundamental point and is as true in my industry as it risks and costs involved in some of these V is in the marine industry. programmes, a realistic view of what is a ordable, a long-term capability plan that is transparent and reasonably consistent that industry, as well as the Q13 Mr Hancock: Having heard all that you say, I MoD, can then plan around and a clear view, think one question to you, Sir Richard, is, do you particularly where a research and development think that your organisation has become too investment is being made or where procurement dependent on the MoD and the MoD has become decisions are being made, as to whether it is a matter too dependent on you and, because of that, the rest of importance that the industrial capability with of the defence industry in the UK which had relevance in respect to those areas needs to be survived that consolidation are having a pretty maintained in the UK. There has not been much of tough time? that mindset; I would not say it has been absent but Sir Richard Evans: Certainly the facts do not fit the I do not think there has been suYcient of that argument. It is not very long ago since we were mindset in the MoD in recent years. virtually 90 per cent dependent upon the UK Mr Howe: I would make a very similar list of points. Government and MoD business. Today, the MoD I think three points stand out and I have made two business accounts for something of the order of 20 of them already. Firstly, as Nick Prest has just said, per cent of our sales. So, the actual dependency in clarity about what MoD want really at two levels, the UK has changed quite dramatically and that has both by way of strategic industrial capability in the changed for many of the reasons that have been UK but also in terms of what they want by way of outlined here, that we have to obviously go where particular programmes. Secondly, clarity about the markets are and where we can grow our sort of research and technology priorities, as I said earlier, Ev 6 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost so that both the MoD and companies put their interested in your comments on that and is this money in the right areas and complement each concern that BAE Systems have had shared more other. Thirdly, very much to emphasise the point widely across the UK defence industry? about realism. I think if one looks at the way Smart Sir Richard Evans: The comment that I would give Procurement has been working and what it has to you is that I think that is largely true. It is an issue contribute—I suspect that we might get on to the that is contained in the Defence Industrial Policy subject more later in the afternoon—a considerable paper and clearly one of the objectives that has been inventory of improvements to the procurement identified in this paper is to concentrate a lot of eVort process is there, but if there is one error, if you like, into trying to open markets up. Everybody accepts which has led consistently to setbacks, that, in defence terms, the UK is the only genuine disappointment and diYculties in procurement, it is open market in the world today but, regrettably, in because the whole community—industry, the MoD virtually all other markets, there is nothing like the and, if I may say, at the political level and the press— same sort of reciprocal arrangement. For UK has conspired to be optimistic about the cost of contractors to compete in America or to compete in military capability and has conspired to neglect the many multi-European countries is exceedingly degree of risk that is involved in major defence diYcult and I think the object of the exercise—as I projects where one is actually buying equipment that say, it is spelt out pretty clearly in this paper—is that does not yet exist and it is what McKinsey’s I think it is in everybody’s interest that all the markets are called a conspiracy of optimism in their work on as open as possible and that is how we generate real Smart Procurement. I think we still suVer from it. competition and get the benefits from it. The figures still show that there is insuYcient investment by the customer in risk reduction in the Q16 Mike Gapes: Are you fighting with one hand early stages of projects before they reach their main tied behind your back? stage of approval and that fact, I think, has led us Y Y Sir Richard Evans: There are obvious di culties in into a lot of the di culties that individual projects this area. Clearly, in the context of competitions that have run into. So, those are three points: clarity are being run here in the UK on an open basis—and about what the MoD want industrially, clarity about it is right that they should be—clearly, if the whole research and technology priorities and realism about of the non-recurring and investment cost has already risks and costs combined with a willingness to invest Y been borne by another party, maybe the American su ciently upfront in the technology. Government, the French Government, the Italian Mr Frost: I would like to add just a couple of points Government or whoever else, and indeed the UK to that. The first one really relates to a fear culture contractor is required to provide for that element in that I think perhaps media attention and other top the cost, the UK contractor is at a serious level issues that we see engenders at the working disadvantage. I do not think that is a problem for level, quite understandably—these are intelligent any of us. That is really, for me, an issue of the UK people—in projects where often a solution to a deciding what it wants. There are always going to be problem is on the table but is perhaps slightly areas where—and I suspect increasingly so—the unconventional, needs a change of plan and the right thing for the UK to do is to buy oV the shelf. I inevitable result is that nobody wishes to perhaps just want to make sure that in other areas we stick their neck out quite far enough to say, “Here is would—and certainly in my company I would think a way out of this particular mess that we are in.” One that is the wrong thing to do—have a proper debate thing is to perhaps at the working level in MoD about it and, if we ultimately do decide to do it, we encourage slightly more proactive thinking with do it for the right reasons and then, if we do do that, industry. The other point that I would like to make we actually get the maximum amount of gain out of comes back almost to consolidation and that is, in a the decision for the UK. I am sorry to keep coming rapidly changing industry, to ensure that the players back to it, but I think JSF is a classic example. It is no in the MoD understand the current capabilities, good when you have signed up and paid your cheque access to technology and resources of the whole of over then trying to go back to negotiate the release of the industry, not just concentrating on two or three technology. It is absolutely not the way to do it and I major companies but 100-or-so key companies with absolutely subscribe to the fact that there are cases V great capabilities both to actually o er technological where it is absolutely proper to buy oV the shelf, but solutions but also to solve the current problems on I would also like other governments to share that existing programmes. So, a broader understanding view. of the structure of the UK industry to date. Q17 Mike Gapes: Can I go back to my question. Do Q15 Mike Gapes: The Government’s Defence you think that the MoD recognise the concerns that Industrial Policy says that open and fair competition you have expressed and as the report that you remains the bedrock of our procurement policy. commissioned expressed suYciently when it However, BAE Systems commissioned a report that evaluates the tenders from diVerent manufacturers? was published in January which highlighted Sir Richard Evans: It is patchy. There are some areas concerns that foreign competitors often enjoy a in the procurement process that are better than competitive advantage over BAE Systems since they others. In the main, these questions are not are not required to face international competition specifically MoD questions, they are the for their market and indeed can often be heavily procurement organisations’ questions. We are all in subsidised by their domestic taxpayers. I would be one hell of a big learning period. This is a big culture Defence Procurement: Evidence Ev 7
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost change for all of us, both the guys at the MoD and being undertaken at the moment, not least some of the DPA and the guys in the industry as well, but I the things that are going on in Brussels in the context would just like to be sure. We have to go through this of the European procurement process. process of shifting our ground and changing the way Mr Howe: Just the Thales view on this. First of all, in which people behave and attitudes, but the as far as the French market is concerned, I would not problem with it is that it takes a lot of time to do it argue that it is as open as the British market is, and, in the meantime, the world does not actually though it has been opening and the French part of stop. Decisions have to be taken, selections have to Thales would argue that now they do have to win be made and contracts have to be placed and I just their business in competition which is much stiVer want to make sure that, when we do that, the UK than it would have been a few years ago. Secondly, gets the best deal out of it. I do not think that, in the case of Thales, we enjoy any advantage in the United Kingdom derived from market conditions in France. The work that is done Q18 Mike Gapes: Mr Prest, in an earlier answer, said on major UK projects by my company and the bids that defence is not an industry which should be we put forward for new projects are almost wholly subsidised. Yet, on the other hand, we are in a based on work done in the UK and UK facilities and situation where you are saying in your own report costs reflecting these conditions. So, we think of that other countries often have heavily subsidised ourselves as a UK company competing in the UK industries and they are your competitors. If we are market in that sense. Certainly as far as the French in this situation, I presume that there are two ways market is concerned, I am sure that the top men in forward. One is that other countries cease to be the company would have no hesitation in saying that subsidised in any way and the other is that we move anything that can be done to encourage all away from the approach we have taken up to now European markets, French or other, to open up and it seems to me and I put it to you that we do not would be wholly in the interests of our company. have either of those. We are in, as you yourself said, a transition. How long do you think that transition will be and are we doing enough and is this country Q20 Mike Gapes: Does anybody else want to say collectively doing enough to get open markets in anything? other countries and, if we are not, what should we be Mr Frost: The view I have is perhaps a little more doing to make that possible? cynical in that I feel that playing cricket when Sir Richard Evans: The transition period, I regret to everyone else has great big baseball bats is perhaps say, is a lot longer than most people think. Making a British way of doing things but is not terribly change on this scale is a huge challenge. Inherently, eVective. They will do what they want to do and we all of us actually hate change and would like to just need to recognise where we are. I think that is continue doing things in the way we have done in the perhaps the first thing and that is being pragmatic past. So, it requires a lot of time, a lot of leadership about all this. The other point I would like to make and therefore a lot of example to be given in order is that, if big investments are being made in those to bring about a change throughout the whole of the countries’ industries, they are hard-headed people organisation on both sides of the table. In the and they will get their money back and the way they meantime, we certainly should be doing a lot of the get their money back usually is in the cost of support. things that we are doing at the moment and in some All I would ask is that perhaps, in these procurement areas may be doing more often. We definitely should decisions, the UK should look very carefully at what not be looking to close our markets up. We should the life cycle cost in reality is going to be, not least be trying to get a level playing field as widely as we through access to rights over technology that will possibly can in order that we are broadly pretty now allow MoD to actually maintain and support much in the same situation. The fact of the matter is that equipment in years to come. So, it is not a that the guys who have really deep pockets, that is question of handouts, it is a question of what we are the Americans, are always going to have a actually buying, a very clear-headed question about substantial advantage on the technology front. It is the support costs and life cycle costs of such the case that there are even today areas where we can equipment. I do not think any government is still beat the Americans, where we are better than the subsidising an industry to no purpose. It is Americans at certain things that we do. Those are subsidising an industry because it thinks it is things that we need to build on. economically beneficial to its own country.
Q19 Mike Gapes: I accept that the Americans might Q21 Mr Roy: First of all, I was very interested in be a problem because of technological reasons but your comments about lack of investment in we are talking here about open markets. We have shipyards especially in Clydeside. Years ago, I only European partners and in fact some of the wish that managers with powers such as yourself companies here have European associations which would have listened to trade unionists when we were are very deep. I would be interested to know what we making those very same arguments. However, I am should be doing to open up the markets in those still caught between what you were telling us and other countries. what you were saying and what was said in the Daily Sir Richard Evans: I think John needs to come in on Telegraph when one of your spokesman was talking. this since we are referring specifically to John’s In that quote, it was said that there had been ownership. There are a catalogue of issues that are expressed an interest in looking at any approaches Ev 8 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost and that oVers to increase shareholder value. That is you and your Chief Executive over the last couple of slightly diVerent from shipbuilding in the future and months have questioned the MoD’s definition of the shareholder value. value for money. How would your company like to Sir Richard Evans: I think the shareholder value see value for money defined? issue is inherently related to the well being of the Sir Richard Evans: I think in the context of a specific business itself. It is not simply a matter of selling the definition we would like there to be a much wider silver in order to pass it across to the shareholders. definition of value for money than is the very narrow The shareholders have an interest and a stake in this definition that the Procurement Agency actually sort of business, all the employees have a stake in the takes. I very much hope that as defence industrial business and the managers have a stake in the policy gets better and better people will begin to business but, at the end of the day, we have to do think diVerently and people will begin to take a what is the right thing to develop the business and, diVerent view of it. I would just like to give you one as I say, the fact of the matter is that here in the UK example where I think this is highlighted. It is an and across Europe there is too much capacity in this actual example, and I go back again to the Hawk business at the present time. I think that a lot of the decision. The recommendation from the investment we are putting into the naval Procurement Executive to ministers was to acquire shipbuilding business today is not simply directed at the Aermacchi plane. We had various doubts and improving the facilities and the fabric of the reservations about the way the analysis had been buildings etc that people work in, it is actually carried out, particularly the cost of ownership, but building up and reconstituting the intellectual nevertheless we were not party to it, this was a capacity that was closed down when the Naval Architects OYce was closed and therefore competition position between two separate entities. redeveloping a design capability not just for the The UK Government in the early 1970s awarded to ships but the integration of the systems that actually the predecessor company, now part of BAE go into those ships and it is very interesting today Systems, Hawker Siddeley, again as a result of that, if you go up to Barrow and look at the competition, the design and development of an engineering block there, there are significant advanced jet trainer for the Royal Air Force. At the numbers of people who are moving from the south time the value of the contract was about £350 million of England and are actually transferring those skills and in today’s money that is about the equivalent of up into Barrow. The same sort of thing is going on a billion. The contract was implemented. in the yards in Glasgow as well. To do that, we have Subsequent to that, and as a result of that, the UK to fundamentally have a capacity that is matched to has sold 800 Hawk aircraft around the world the market. If somebody can do that better than we generating sales value today to the equivalent money can do it today, it is in everybody’s interests that we of about £15 billion. In our view, supported by the should listen to what— professionals in the sales organisation, in the MoD, there is a view that there is a continuing market for Q22 Mr Roy: I am just talking about a diVerence in the Hawk, albeit with further development that you emphasis. I thought you were giving an approach would expect to take place over a period of time, that where you were actually putting public interest a wee would result potentially in a further market of about bit more focused as opposed to shareholders’ value 400 to 500 aircraft. In the decision taking or the and I think it would be wrong, if anyone is watching recommendation that was made to the ministers, this, to say that Sir Richard is really putting a great there was absolutely no account taken of that emphasis on the need for public interest when, a additional value to the UK. You might argue why couple of days ago, your company was saying that it should the MoD take it into account? Are they paid was really all about shareholder value and it would to take that into account or not? I think that is one be wrong for anybody to take that message away of the wider value issues that should be taken into from what you said earlier on. account. I can tell you that since that decision was Sir Richard Evans: If you think there is a wide taken, the Indian Government have placed an order diVerence or disparity in those views, then, I am for 66 Hawks which, had that decision gone against sorry. I genuinely do believe that it is very easy to us, would not have been placed. The Indian absolutely crystallise one particular piece of interest requirement will almost certainly exceed 200 as being in the interest of the shareholders, one in aircraft. There is a huge replacement programme for terms of employees etc. At the end of the day, what earlier Hawk aircraft that have already been we want to do is to see this business being hugely delivered. I can genuinely see us actually being able successful. If somebody can make a better job of that to sell a further 400 to 500 aircraft. On the basis of for the reasons that I have described, it will be an investment made 20-odd years ago, £350 million, completely wrong for us to prevent it happening. to throw that away and actually give another five Conversely, if we are able to do that in partnership billions’ worth of business to the Italians or and with our partners here in the UK, that will be somebody else, and at the same time shut a factory absolutely fine as well. and make a lot of people unemployed, whatever the bloody rules of economics are, that is certainly not Q23 Mr Roy: If I can just take that one area, for economics as I understand it. Somehow in the example, where I suppose the public interest and process of evaluation that was the recommendation shareholder value that you hold so dearly would that was made. How on earth it could have been certainly join up in relation to value for money. Both made, I cannot believe. Ultimately it required the Defence Procurement: Evidence Ev 9
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost
Secretary of State for Defence to issue a ministerial published either at the time of our Annual General directive to overturn it. This is the lunatics having Meeting or the time of our results in order to inflict taken over the asylum. the maximum amount of damage on us, there is Chairman: You have made your point. Frank, actually nothing new in them. When we completed carry on. the Marconi transaction we gave absolutely definitive and binding commitments to the Q24 Mr Roy: You spoke at great length and, I have Government of the United States in the context of to say, a lot of it was going over my head there. Can adopting completely the US Foreign Corrupt we focus in a wee bit more. The question was how do Practices Act. That was implemented and we you define value for money in such a way that the actually had a team of lawyers from the US Government does not? responsible for giving advice in the context of the Sir Richard Evans: I thought I had given a way in which American companies have reasonable example. Had the recommendation been implemented this process and it was taken on board adopted by ministers that was made by the with all the safeguards, including hotlines, procurement organisation, I think that we, the UK, whistleblowing, etcetera. Subsequent to that, of would have lost business to the tune of about 500 course, the OECD recommendations were more aircraft in the export market. That has a value implemented and here in the UK they were put into to the UK. It is a huge amount of money that goes legislation through the Anti-Terrorism Bill, became to the Exchequer. Nowhere in the recommendation law in Parliament and those constraints go much, is that brought into account. My point is that when much further than the US Foreign Corrupt Practices you look at these sorts of recommendations there is Act. I am satisfied, insofar as I reasonably can be, a much wider issue and this should not be looked at that all of the appropriate safeguards exist in our absolutely narrowly, and even looking at it in a organisation, but I have to say that when these narrow sense we think it was an injustice anyway. allegations are made they are obviously damaging. Nobody thus far has produced evidence to us, Q25 Mr Roy: How has the Government responded despite the fact that we have made a number of to you? invitations to people to do so, other than that which Sir Richard Evans: The Government responded by was ultimately submitted to the SFO. Obviously if issuing a ministerial directive forcing the Ministry of there is new evidence available and it is brought Defence civil servants to change the forward then clearly it would have to be recommendation to sign up for the Hawk—it has investigated. Certainly in the context of the practices not been signed up at the moment but it has been that we and all other companies work to, because all announced—and the result of that is patently clear of us have to operate within the framework of the for all to see, that already we now have an additional law, we have a duty to our shareholders to ensure 66 aircraft in the order book that we would not have that we are completely compliant with the law, not had otherwise. just here in the UK but wherever we are operating. Chairman: We have got another 15 questions to ask still, but I take your point. Q27 Mr Hancock: Are you saying that article was Q26 Mr Jones: You say obviously the MoD is the not true? main customer and you made reference to exports in Sir Richard Evans: I am saying that the allegations terms of their importance. The defence industry is contained in this article are of wrongdoing, and I obviously very important to many of our think you have got to be quite careful about how you constituents in terms of jobs and in terms of UK plc. define wrongdoing in these contexts, certainly the What damage has been done to that, not just to your allegations and assertions of the laws being broken, company but to the industry in general, by the etcetera, are allegations that I at this time, and allegations this week in The Guardian newspaper? Is regularly, completely refute. Until there is some it important that when we are winning contracts evidence that we have broken the law that I do not abroad, we are not just seen to be winning because have at the moment, obviously I have to continue to we have the best product but we do it in an ethical refute it. way? Clearly there are issues which aVect your particular company but obviously it paints a broad brush picture across the defence industry in general. Q28 Mike Gapes: You may not have broken the law What can you do to actually put forward the best in the context of the UK but nevertheless you might face of UK plc defence when you have got have made payments to members of the Saudi royal allegations that clearly are being made and are being family which would be regarded as unethical or used by those people who are against the UK immoral. If we have changed our practices as a result defence industry?1 of recent US legislation or anti-terrorism legislation Sir Richard Evans: These allegations stem from one that is all to the good, but clearly there are issues that source, which is The Guardian newspaper. This is a date back a number of years. As far as I have seen, campaign that has been running for a long period of the allegations are something that goes over several time. In the context of the recent allegations, which years and talks about events three, four, five years incidentally I would remind everybody are always ago, at least. Would you agree with me that in the past there has been lax practice and that things have 1 Ev 130–131 been done that would not be tolerated today? Ev 10 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost
Sir Richard Evans: I think that business practices Sir Richard Evans: I think also at the PAC meeting have been changing over a period of time. I can to which you referred, both the Chief of Defence certainly assure you that we, and I believe most Procurement and the Permanent Secretary made companies, are not in the business of making exactly the same point that we have been making, payments to members of any government. I would and that is that we have to find a way of getting a just like to reiterate that not only are we bound here much better balance on the whole issue of risk. by the laws in the UK but we are bound by the laws Reference was made to the National Audit OYce wherever we operate. This is not a question of people report on major projects where, from memory, I passing, as you suggest, large sums of money to think the figure reported in the context of pre-main employees of governments, it is just not the way that gate expenditure was 4.4 per cent against a business is done. There is a huge amount of recommendation contained in the smart speculation that goes on on this subject and it makes procurement arrangements of 15 per cent. That gives good copy possibly but it is pretty far from the mark. you a measure of the gap. Both sides have learned an Mike Gapes: We will await the outcome of the awful lot out of this. There is a sort of dichotomy in investigation, I think. this in that to get to what is called main gate and, therefore, to get approval, you have to have a price for the programme and you have got to have specific Q29 Mr Cran: Can I move us on to the question of delivery dates identified with that price. The fact of risk sharing. The danger of this whole issue was the matter is I think we are all agreed that through recognised in the original document of 2002, circumstances we have been forced to go to main Defence Industrial Policy, which must be bedtime gate far too early, ie before we have expended 15 per reading for the lot of you. It says: “If this risk cent of whatever it is to de-risk the programme. I becomes unmanageable, it could have serious have to say that it is a consistent criticism, it is in the implications for the companies involved and the existing NAO report but it has been in many earlier equipment programme as a whole”. That is fairly NAO reports, that the original price and dates for clear. I think the Committee was interested, and I delivery that are quoted to get through main gate certainly was, when your Chief Executive was put in virtually all change, without exception, over the life front of the Committee of Public Accounts on 23 of the programmes. As I say, the Chief of Defence February this year, and he said this: “Industry took Procurement was saying exactly the same as we are far too much risk in the past and we, BAE Systems, because this is an issue of mutuality. It is just as are not doing it in the future.” I mean no impropriety important to them that they understand what it is about that whatsoever. “There is a far more they are paying for and when they are going to get it attractive market in the United States if the MoD as it is for us to understand that we can actually terms of trade do not change.” That is a powerful design and build and deliver it. This is not an issue statement. You must certainly agree with it, Sir where we are on opposite sides of the fence. There is Richard, but does everybody else agree with that? a lot of work going on at the moment to get a much Mr Howe: Risk was one of the points I alluded to better understanding of how we achieve these earlier, I think it is one of the defects of the present objectives. system that not enough is invested in exploring and limiting risks at the beginning of major projects and decisions are taken to embark on major projects Q32 Mr Cran: This is a rather important issue for without suYcient investment on that front. I would you certainly, for all of you. Could give the agree with you on that front. I have to say primarily Committee a sense of when you think that you are I think the solution is in the hands of the customer going to get a resolution of this? A lot of work is to make sure that he does not take these very large being done, you say. decisions to proceed with major projects until Sir Richard Evans: I do not think that there is a big suYcient preliminary work has been done because bang solution to this, that we are going to wake up obviously, as you implied, risk cannot simply be one morning and say that suddenly we have got a passed on to industry. If a project does not work or complete answer to this. In part, at any rate, the is not delivered then the customer suVers at the end answer to this depends upon the specific of the day. It is a joint problem. programmes. There are things that are happening that you can look at today that will give you, and should give you, encouragement on this. The carrier Q30 Mr Cran: I take it that there are no dissenting programme is a really good example where the voices to that? original intention was to go through main gate in Sir Richard Evans: No. something like March time and that was largely Mr Prest: No. because the existing pre-contract funding eVectively ran out at the end of the financial year. We and Q31 Mr Cran: Where is the balance? Clearly you Thales, who are in the partnership in the context of have been making representations to the being required to bid who had bid and created the Government, I would be very surprised if you had partnership in the context of continuing with this not, particularly on the 2003 completion of the programme, were advising the MoD that there had review of this particular document. The question is been insuYcient de-risking. From memory, at that (a) whether you have made representations and (b) time I think the amount of expenditure in what we what has been the Government’s reaction to that, or call the de-risking phase was about two per cent the MoD’s or whoever? compared with the 15 per cent, not even where the Defence Procurement: Evidence Ev 11
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost
NAO average of 4.4 per cent was, not anywhere near the risk under control”. Secondly, against that, there it. The result of that is that the programme has not is obviously a very diVerent corresponding position been presented for main gate approval. Additional and view of profit. The actual profit allowances in funding has been found to keep pre-main gate the United States are vastly diVerent from the profit funding running forward and that will enable a lot allowances here in the UK. In competitively more work to be done. Both of us are very clear that contracted business—I stand to be corrected on we do not want to go to main gate until both of us this—I think the current profit rates in the US are are confident on what it is we are pricing and oVering running at about 12 per cent on sales. Indeed, the on delivery and for the supplier and for the buyer to Pentagon themselves recently have been seeking to have a reasonable degree of confidence that that is increase the rates of profit in order to improve the what he is going to get. financial health of the contractors in order to be able Mr Howe: I have nothing to add to that at all. Good to get more investment from the contractors back progress has been made by the team in continuing into the R&T budget. Corresponding numbers here with the design, so I would not like you to think that in similar circumstances under the current the work has been going badly. The work that is arrangements are probably more like five per cent. going on at the moment to complete the design and There are two issues, one is a much more sensible to assess the risk associated with that is essential view towards the management of risk, the before the Ministry takes that big decision. assessment of risk and breaking programmes down into manageable pieces without at the front end committing ourselves for the next 25 years and at the Q33 Mr Cran: In asking my next question I do not same time looking at how you get the risk-reward want to imply that you are not going to succeed in ratios into the right balance in the context of what the dialogue that you are having with the the contractors can actually earn. Under those Government over this issue and that you are not circumstances, the Pentagon, ie the procurement going to reach a rapprochement. Your Chief agency of the United States, has every right to come Executive did actually say: “There is a far more and expect the companies to be investing into R&T attractive market in the United States if the MoD to support defence programmes. terms of trade do not change”. What is it about the US market that makes it so attractive, apart from, I guess, the money, the technology and all the rest of Q34 Mr Cran: To state the obvious, I guess you have it? Is that transplantable into the United Kingdom? been making exactly the same points to the Sir Richard Evans: Certainly it is transplantable. It Government and I guess the Government are is interesting that pretty much the same contracting considering it. processes were operating in the United States Sir Richard Evans: Absolutely. I do genuinely something of the order of 12/14 years ago as are believe, notwithstanding where the NAO have been operating here today with regard to programme coming from, that the procurement people in the launch, lack of investment and de-risking etcetera MoD are looking at some of these arguments, there that virtually brought the entire US defence industry is certainly the issue of risk assessment and the close to bankruptcy. It caused a complete agreement now is that there is going to be much reassessment of the whole of the contracting more money spent on that risk assessment phase processes and procedures to be introduced and those than has historically been the case. That is desirable procedures that are operating today in the US are and that is certainly going to happen at the US end. very much in line with the recommendations that we As always, the problem with the MoD people is would make today, and have made today, to the simply budgetary constraint. The process of MoD. They are largely about breaking these government accounting has always been a bit of a programmes down into bite-sized opportunities, not mystery to those outside it but it seems to me at the having to definitively say on day one “this is what it moment that the great problem the MoD has is that is going to cost and this is when it is going to be its actual liabilities in terms of current programmes, delivered”, desirable though that would be to do if notwithstanding what it may have to do tomorrow, Y we could do it, ensuring that su cient de-risking has in respect of the programmes that it is currently been undertaken before we get to the point where we committed to, exceed what we would describe as the are definitively pricing and at the same time asset base, which in their case is the budget. In the recognising that if you do not start with a delivery V external world, the next stop is to go and talk to the date and do not start o with a price, there have got administrators. There is a certain amount of to be some review points in those programmes where sympathy we all have for the MoD and to do these both sides can step back from it. For instance, if we things diVerently does in the short term sometimes see the risks, and even on the US basis after the require additional investment but in the long term, programme had been launched there are review over the life of these programmes, will without a points, and if the risks are working out not to be in doubt pay back very handsomely. line with the initial assessments that were made then the buyer has the opportunity to say “We either want to stop the programme and review the Q35 Mr Cran: My last question is simply this: just so programme or there are certain circumstances in that we know how far you are prepared to go to back which we can abandon the programme because there your views, and all of you hold them very strongly is no point travelling in hope here if the costs are on this particular subject, have any of you actually going to continue to escalate because we cannot get withdrawn from a contract, assuming the terms of Ev 12 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost the contract allowed it, where it became apparent to Thales then basically brought our teams together any or all of you that the risk that you were being under an alliance and have been working under that asked to take was too great, or becoming too great? alliance very satisfactorily ever since. I think our Sir Richard Evans: I can give you one recent concerns now are that what is actually developing is experience where we were in the consortia we were some sort of procurement committee and this operating with for the tanker programme and we programme, which is certainly the biggest single simply walked away because the amount of risk that military programme that would have been launched we were being asked to take could not be justified in recent years, is in some way going to be managed and there was a potential issue in terms of whether by a committee. The committee will be chaired by a the consortia bidding for that, which we were in, procurement oYcer from the Ministry of Defence ultimately could aVord to expose suYcient of its who will have a balancing vote on the committee. balance sheet to the potential liabilities. There are We are somewhat concerned when it comes to the other examples as well. issue of who is responsible for what risk whether a committee can adequately deal with the Q36 Mr Cran: Any others, so we may know if this is management of a programme of this scale. We have common practice? no problem at all if that is what the customer wants Mr Frost: Yes, but on a much smaller scale where on to do because, let me be clear, it is the customer’s one or two UK programmes the volumes were so prerogative to decide how he wishes to have his small and as an equipment supplier the numbers of programmes managed. If we were not to be within aircraft were so small that it simply would not justify that committee grouping in the ideas that are just the amount of investment we would have had to put being bounced around at the moment then quite into both the proposal costs, which were significant, clearly we would want to become a subcontractor to and of course the unfunded elements, such as the management team and make our shipyards development. I would like to add a comment. It available and all of our engineering skills available seems obvious to me, just looking at it from that in order to make the programme a success, not to be level and from a distance, as to why any risk sitting as part of a committee at the top that may equation in selling defence equipment to the US generate risks that ultimately would become would look totally diVerent. It is simply a matter of uncontrollable. Absolutely we recognise if that is scale and volume. If my company is going to sell one what the customer wants to do then he is entitled to thousand ship sets of something, we are much more do it. likely to increase the ante in the risk we take on the non-recurring development end compared with a Q39 Mr Hancock: Providing he pays. programme, perhaps, where the UK is buying 50. It Sir Richard Evans: Well, at the end of the day, is simple economics. providing this committee can manage the programme within the budgets which have been Q37 Mr Hancock: What about when you are buying agreed when it does go through main gate, we know two, like two carriers? Are you close to the breaking that everybody will be deliriously happy and rightly point on the risk assessment you have made on the so as well because it is a hell of a challenge, but if that cost of the carriers and your ability to carry that risk? were not to be the case, if people start sort of Sir Richard Evans: As yet, there simply has not been shuZing the deckchairs around looking to see who suYcient work done to get us to the point where is actually responsible for whatever the failings are, anybody, and by that I mean anybody on the it is a bit like good old-fashioned consortia where industrial side or anybody on the procurement side, everybody has got a bit of it, but no one individual could realistically today make a full assessment of is actually responsible. However, under the current risk. If it were the case that you could make that proposals or as they were proposed, there is no assessment of risk then this programme would have doubt about it that Thales and we together, shoulder gone through main gate and, as I have said to shoulder, are absolutely locked in in this right at previously, it has not done. I suspect there is the front end of it. probably realistically at least another year’s worth of Chairman: Thank you. We will come on a little later work to be done before we begin to see whether the to this. scale of risks here can be managed and how they can be managed. Q40 Mr Crausby: Still on risk, last year we looked at the problems experienced on the Astute and Nimrod Q38 Mr Hancock: This really relates to working in projects, so can you tell us something about the alliances, does it not, and whether or not it can revised arrangements and, perhaps more materialise as a financial gain for the company as importantly, are those arrangements working as well as oVering the defence industry stability. Why expected? do you think there is so much speculation about Sir Richard Evans: Well, I can tell you that yes, they BAE Systems remaining the prime contractor for are working out as expected. There is a much the carriers? improved partnership in the context of the Sir Richard Evans: First of all, I should say that the management of these programmes and, as a result of original decision that was announced was that there that, there is a lot of stability where both of these would be an alliance and the alliance was between programmes are currently to budget and to time BAE Systems and Thales. That was announced after against the revised contract terms. In the case of the result of the bids was made public. We and Nimrod, we have had a lot of stability in terms of the Defence Procurement: Evidence Ev 13
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost design configuration now in the last three months, will be at least two complete refits or maybe more which gives us confidence that we will fly the first than two refits, and those refits need to be supported aircraft in the mid-year point. In the meantime of in engineering terms by our designers, so we really course, on Nimrod, the whole of the system’s need a sort of long-term master plan for the nuclear architecture that is on the ground rig has been submarines and requirements in this county. It needs developed in time and has now for some months to be agreed between the two of us and then we need been interactive with airborne sort of systems and to agree how we are going to make sure that those with ground-based systems and I would say to you resources are maintained, but there are those two today that on the basis of the recent review we did on opportunities which are perfectly clear which will be both of these programmes that both of these required to be fulfilled and it is, incidentally, why it programmes are looking good. is so important that we retain the intellectual capacity in engineering. Again if I can keep harping Q41 Mr Crausby: So they will be delivered within the back to JSF, the fact of the matter is that on JSF arrangements? there will probably be two or three major updates Sir Richard Evans: Yes. throughout the large programme and we know that those updates will be undertaken by Lockheed back in America and not here in the UK. In the case of the Q42 Mr Crausby: Earlier on you made what I submarines, if we do what I have suggested, that thought to be the quite valid point about the loss of work will be done in the UK. submarine designer skills on Astute and I think you said that it must not be allowed to happen again, so how do you prevent the loss of submarine design Q44 Mr Crausby: Moving on to the Future Carrier skills? programme, can you tell us what lessons you have Sir Richard Evans: Again it takes you back into this learnt from the Astute and Nimrod experience with Defence Industrial Policy paper. We need to have a regard to that programme and the question of risk? progressive discussion together with the customer to Sir Richard Evans: Well, I think, firstly, you are ascertain what the long-term requirements are in the looking with the Carrier programme at the context of nuclear submarine capability, design and combined resources of Thales and BAE Systems build. Assuming that there is a continuing which is clearly a much greater depth of resource, requirement, we then need jointly to have a plan know-how and knowledge than would have been the whereby we sustain the appropriate level of case if either one of us alone had been engaged in this capabilities to ensure that if there is a break in the programme. I think the obvious issue here is that, current programme and a year later a requirement is again going back on to this whole issue of risk placed upon us, we have the design and engineering assessment, we actually get suYcient monies skill-set in place actually to manage that expended in terms of design engineering before we requirement. As I said earlier, the diYculty that enter into definitive contracts for price and delivery GEC were faced with when the initial Astute so that we know what those risks are, but I certainly submarine programme was launched was, firstly, believe that between the two of us, we have got the GEC had never designed and built a submarine capability, assuming there is absolutely no previously, and, secondly, those guys who had all the extraordinary risk identified, which is not the case know-how were retired and very content in the west today, but on the basis of the way we are going, I country and certainly they were not queuing up to would guess that both of our design teams would become re-employed and live in Barrow. Now, we agree that we would expect to manage the risk. simply want to ensure that that does not happen Mr Howe: I think so, yes. I think, as I said earlier, the again, but we can only do it in consultation and programme so far, contrary perhaps to perceptions agreement about sharing those objectives with the outside, is actually going very well in terms of the customer. design work which has been going on, planning work and the assessment work. The formation of a Q43 Mr Crausby: You made a point about the break joint team between BAE and Thales was quite a in the submarine programme and I do understand challenge after we had just been in intense why last year you wanted to concentrate on competition for a long time, but actually it fell into submarines, but how can you retain those design place very well and it is working well, so if the MoD skills if you are not prepared to shift to Barrow? judge that they want to, as it were, change the Sir Richard Evans: Well, there are really two ways we arrangements for the alliance and change the can do it and again this is a matter for discussion and arrangements for the management of the agreement. First of all, we have to have some clear programme, I would not want people to think that indication of whether there will be ship sets beyond that is because things have been going badly on the the third boat. That being the case, there will project; they have not. undoubtedly be updates progressively going through the design as we go through the boats Q45 Chairman: What percentage of work has been beyond two and three, so that is one area. The divided amongst the allies? Have you worked that second area is looking at the various requirements in out yet? terms of mid-life updates for these ships over their Mr Howe: Well, the MoD gave a broad indication entire life-span. These ships or boats are likely to be when they announced the decision 15 months ago in service for anything between 30 and 40 years and that it would be about a two to one division between the likelihood is that over that period of time there BAE and ourselves. Actually I think at the moment Ev 14 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost
Thales has quite a high share of the activity because Q49 Chairman: But if, as John said, the French the activity has to do largely with the design work proceed with designs that are largely British, does which is one of the elements on which our proposals that mean to say that they are proceeding because were chosen, so the way the work is being shared at Thales designed the carrier and, therefore, they the moment is not necessarily a complete reflection borrow Thales’ design or do they have to go to the of the overall balance of the programme between us Ministry of Defence and say, “May we use the in the long term. designs that you, the Ministry of Defence, paid for?”? Mr Howe: I think there are some important rules of Q46 Chairman: What progress has been made to engagement in that sort of area which, as far as I permit BAE Systems to bid into the new French know, have not yet been decided or laid down. Carrier programme? Mr Howe: Well, I cannot give you a direct answer to Q50 Mike Gapes: Sir Richard, I would like to raise that, except that, as you know, both governments some questions which may not be very comfortable have made it clear that they want there to be a for you, but in the last few weeks or so the press have measure of industrial co-operation, co-operation at not been particularly friendly to BAE Systems. the industrial level between the French and the Sir Richard Evans: Is this a new situation! British, given that the French have indicated that they want a carrier which is broadly of the British Q51 Mike Gapes: Well, I think the number of type. The discussions on how that is going to work headlines seems to have been a bit more than are not yet fully advanced and we, on this side, are normal. Could I put it to you that it appears that the talking to the MoD about it, and I am sure there is relationship between your company and the MoD a dialogue with the French MoD on the other side, have reached an all-time low, and if I could just refer and of course I think the question of actually what to a few issues, the overruns on Eurofighter shape of industrial structure is there going to be in Typhoon, the problems on the Future Carrier the UK in the long term will enter into that. programme and the announcement that you made about considering selling your naval division, in the light of all of those and other diYculties, how do you Q47 Chairman: Sir Richard, do you have any high see your current relations with the Ministry of expectation of being able to participate in the French Defence? carrier programme? Sir Richard Evans: Pretty robust. I think that when Sir Richard Evans: Not to any significant extent. you look at the issues that are under discussion at the Mr Frost: I would just like to comment from the present time and the importance of them to both of supply chain, which is that I would just hope that the us, it is perfectly understandable that they will get, UK Government would be as robust and as and, I suspect, could get, quite a bit tougher than thoughtful in its entry into negotiations as the they have been to date. French Government. Mr Howe: Can I just make the point that, as I say, it Q52 Mike Gapes: Really? is early days and we will see how this works out, but Sir Richard Evans: I would like to take you on on I would not have thought that it will be a question of Eurofighter, and there are various press articles on the French doing a lot of work on a British carrier or Eurofighter which have appeared not just this week, the British doing a lot of work on the French carrier but on previous occasions. BAE Systems has no in terms of the work-share shifting, and I would have contractual relationship with the UK Ministry of thought there would be a broad two to one balance Defence at all on Eurofighter, just so that we stake because the French are buying one carrier and we are out the arrangements here. We are a sub-contractor buying two, but it is only surely commonsense that to a company which is contracted to design, develop, if the French are buying a carrier which is pretty build and supply Eurofighter aircraft, and we are similar to the one whose design in the UK is now discharging our part of that programme. The UK pretty far advanced, there must be an advantage in Government, and we support them in this the two programmes talking together at an completely, wish to make changes to the industrial level, if only to get a handle on risks, to international contract to which we are not a party. give more confidence in timescales and to get a The principal change is to introduce a new variant of handle on costs, the sorts of things we were talking the aircraft and to introduce that variant at tranche about earlier. two. There is some truth in the speculation in the press regarding our view on the pricing of those changes which are very diVerent from the views of Q48 Chairman: Who has the intellectual property the Ministry of Defence, but I have absolutely no rights on the design? Is it Thales or the Ministry of doubt that in due course a resolution to this will be Defence? found and the Eurofighter programme will continue Sir Richard Evans: The intellectual property rights and be a highly successful programme. In terms of certainly will not be owned by the Ministry of the small number of aircraft delivered to date, the Defence and indeed this is contracted convention, RAF, in what is called ‘Case White’, are getting but the Ministry of Defence will eVectively have free absolutely exceptional levels of flying out of the right of use of whatever intellectual property rights aircraft. The early part of the programme which we are generated. are in at the moment, which is always a very diYcult Defence Procurement: Evidence Ev 15
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost period as the aircraft is going into production and that if there is a case and somebody has a proposal early aircraft are being produced, which is right at to put to us and we can see a way of more eYciently the top end of the learning curve, is a very diYcult securing a long-term interest of this business, we will point of the programme to take a judgment on in the follow it, but we are nowhere near the point of context of what the final cost outturns will be. people putting oVers on the table for the business However, when you want to make a change to a at all. programme as big as this, then it requires in this case a variety of disciplines to support those changes and there is a lot at stake for me in the capacity of my Q56 Mike Gapes: So you would say that there is no company and there is a huge amount at stake for the substance in any of these reports? Ministry of Defence because of the size of this Sir Richard Evans: Well, there clearly is no substance programme, so it is pretty robust. on the basis of what I have said and the fact is that there has been no debate or dialogue with the French Q53 Mike Gapes: But is it not true that your about the French buying these yards at all. What company is trying to get cost overruns on the first there is some substance to is that if we are going to tranche put into research and development costs on have a long-term partnership to support this the second tranche? business, there have to be two of us agreeing to that Sir Richard Evans: No, absolutely not at all. The long-term plan and it includes things of the sort pricing arrangements for all 600-plus aeroplanes which have already been raised in terms of how you were agreed at the outset of this programme. maintain the engineering and the intellectual Tranche one is oV that programme. It is priced capacity which is required to support the long-term against an agreed learning curve, it is priced against design and engineering for this business. Now, I delivery dates and if there are any changes to the thought, and I still continue today to believe, that programme in terms of deliveries or to the technical that was a view which was shared by the Prime specification, the contract has got to be re- Minister and by other senior members of the negotiated. If you want to change the programme, Cabinet at the time when we acquired this business change the deliveries and change the specification, from GEC Marconi. Now, since that time budgets you are actually buying something diVerent from the have become incredibly diYcult, incredibly tight and one you ordered and that is actually what is maybe the number of Type-45s is not going to be as happening and we support the MoD completely on big as we thought it was, maybe the number of this. We think we need a air-to-ground aircraft nuclear submarines is not going to be as big as we capability, so we are entirely supportive. This is a thought it was and if that is the case, that changes the hell of an expensive venture and it requires a very big dynamics of the business and we have to have amount of investment to be put in and this is not an answers to these questions because quite clearly we investment that the other governments are willing, are pouring investment into these sort of businesses standing at the bar, to share. It is inevitable that it is and it is on a set of assumptions at the moment, but going to be very robust. if those assumptions do not materialise, then we will never get our money back. Q54 Mike Gapes: You are talking about £700 million, according to the press reports. Sir Richard Evans: Well, I do not think any of us Q57 Mike Gapes: So clearly, from what you have know at the moment what it is because I come back just said, I would not take it that the relations with again to the question of risk reduction. There is the MoD could be described as very harmonious at absolutely no significant work being done on an air- the moment. to-surface variant of the aeroplane and, therefore, in Sir Richard Evans: Well, I think you need to be the context of the investment of the non-recurring careful about how you define the MoD. The MoD is costs, none of us can put our hand on our heart with a sort of house of many branches. It is absolutely any certainty and give an indication of what they true that the guys are under intense pressure in might be, but for sure we know what disruption to procurement and that is because we consume such the main-line programme will be and it is an enormous part of their budget. I suspect in the considerable. context of what they are committed to, they do not have the budgets to meet those commitments, so that Q55 Mike Gapes: Can I take you then on to your is a pretty fractious relationship. Then there are proposals to sell your naval division and you other parts of the Department with whom we have touched on this earlier, but can you just confirm extremely good relationships. You have only got to what the position is on that because there is a report go and look at the preliminary reports from the Iraq that you had lost your battle with the Government conflict in the context of the quality of equipment and also in one report that the Government had that we have supplied to the military, the scuppered your plans to sell the naval yards to the performance, the maintainability and the reliability French. of that equipment during and in the theatre of war Sir Richard Evans: That is complete rubbish. There and to look at the praise which they have given us to has been no discussion of any consequence about understand that there are areas of the Department selling the naval shipyards to the French. The which are hugely supportive of us, but that does not French have not made any oVers to buy the make very good copy in the press, I would agree shipyards, and I go back to what I said previously, with you. Ev 16 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost
Q58 Mike Gapes: So you would not think that we at such an elaborate length, but I hope you get the need to go on a charm oVensive to try and restore drift of my message and I shall send a copy of my relations or to take some concrete steps to try and get remarks to Mr Hoon and to Lord Bach and I hope back on an even keel? that we can see a better relationship in the future Sir Richard Evans: No, I agree with that statement. than we have witnessed in the past. Where people feel in some way oVended by the Sir Richard Evans: Well, Mr Chairman, I do not robustness or the attitude to them and it causes want the Committee to go away believing that all is oVence, clearly we have to put that right. I do not sort of sweet and light within the relationship. know whether GeoV Hoon feels that that is the case, V but if Geo does feel that that is the case, then I Q61 Chairman: We know that! would be the first guy to go to him and eat humble Sir Richard Evans: There are some pretty big pie and be very explicit in the fact that if we have V tensions in the relationship. Your remarks are caused some sort of o ence, we should put it right. absolutely correct. We need to put this behind us and have a fresh start on this. It is hugely important for Q59 Mr Jones: Does that include the Chief all the reasons which have been discussed and Executive? referred to today that this should be the case and I Sir Richard Evans: Absolutely. When I speak for the want it to be quite clear that in the context of my company, I speak for everybody in it. position, and indeed Dick Olver, who is taking over from me in July, our objective is to have a proper and Q60 Chairman: It seems, Sir Richard, a fairly good good relationship with the most important single relationship you have had, but then we have all been customer that we have. deceived because the impression we have had over Chairman: Well, that is encouraging. Perhaps we the last two years is that relations are pretty bloody should bring you back as an adviser and you can stir awful and if they are getting better, I am very happy. things up from the sidelines! As somebody who has the interests of the British defence industrial base very uppermost in his mind, Q62 Rachel Squire: It perhaps seems a very good it seems to me faintly ridiculous that the Ministry of moment to move the focus away from the prime Defence and the largest defence contractor are contractors on to the management of small and engaged in what appears to me to be a seemingly medium-sized enterprises. Can I ask you, Sir endless conflictual situation. I do not know whether Richard, as the Chairman of the Defence Industries you need marriage guidance counselling. The OSCE Council, and Mr Frost particularly, to comment on has great expertise in bringing together and answer a couple of questions. I think in spite of irreconcilable entities or entities who are finding it the focus we all tend to give to prime contractors, very diYcult to enjoy a more harmonious existence, smaller firms are considered to provide the essential but bearing in mind the importance of BAE Systems foundation for the United Kingdom’s defence for the MoD, I really hope that what you are saying industry, so can I ask whether the Defence Industrial is true, Sir Richard, because you are very important, Policy and the Ministry of Defence’s acquisition you employ 40,000 people in this country, you are a policies and processes adequately acknowledge and prime contractor on a number of key equipment reflect the diVerent circumstances of small and projects and I very much hope that if you are reading medium-sized enterprises as opposed to the prime the situation correctly, and I very much hope you contractors? are, that what diVerences there are will be, if not Mr Frost: This is always a question that I love. I sunk, reconciled or managed better. I think whoever suppose if I were to put my hand on my heart, I is shooting from the hip on both sides ought to would have to say no, but we have made a heck of a ponder very, very closely the consequences of doing lot of progress. The important thing is the that because it is very damaging and if you go under, recognition of the whole supply chain. We are in a if you get rid of aspects of your production, then global industry and there are parts of that chain there will be other predators only too delighted to which will be small UK companies and there are also step in, too delighted to step in, be they American or quite a lot of often unrecognised large UK French or Japanese or whoever, so I would appeal to companies who are not prime contractors, and I you to use every possible opportunity in the time you could mention a couple of names, like Smiths and have before you retire to try to mend fences because Cobham, for example, who are very major players it is a pretty unedifying spectacle that we are globally, so the supply chain issue is quite important observing. Both sides are at fault. You have screwed and is recognised within DIP. That does not mean up on a number of projects and the Ministry of that we do not have a long way to go, particularly in Defence is pretty insensitive and bureaucratic with a the consolidation issue which often means that the millstone of a structure for procurement hanging supply chain is less visible to the MoD. The MoD around its neck which in some ways is the source of has to deal with fewer larger contractors and often the problem and not the solver of the problem, so it ideas from the supply chain are hard to get access to, is not just turning the heat on ineYciencies in your and that is an issue we have all got to work on company or any other company, but looking at the together and is recognised and is being worked on. procurement process and seeing whether eventually However, I think there is another factor which is you can squeeze some degree of eYciency out of it important and, perhaps to take the focus oV BAE which meets the desires of the consumer. I apologise Systems for a little while which I am sure Dick will for a piece of rhetoric rivalling your own, though not not mind, we have lots of customers, so BAE Defence Procurement: Evidence Ev 17
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost
Systems is a major customer, Rolls-Royce is a major expensive because bids have to be sustained, that is customer, GKN is a major customer, Boeing is a one of, I think, the industry’s legitimate criticisms of major customer and so is Lockheed, and one of the the approvals process, slowness of the process, and important things in all this is that it is diYcult for us in a sense the uncertainty of it, so I would rather to do business with them if they are 3,000 or 5,000 endorse the CDP’s criticism on that point. miles away. We need to encourage them to have a base in the UK where the smaller companies, who Q66 Mr Viggers: May I put a personal point of view are often quite local to them in regional clusters and which is something I have always felt and that is that so on, have the opportunity to compete globally at the initial gate and main gate in the approvals that local level. Now, that is a factor which is very process is an attempt to bring sense to hugely hard to address, but one thing is for sure, that these multifarious businesses and that by seeking to companies move away to nations where they can get impose a pattern, it may well have created its own better support and they are all looking at it all the problems. It follows from that, if you follow the time. I can assure you that the US companies I am logic, that the project managers should be given involved with have a league table of nations in which rather more power and rather more responsibility. they should invest in the defence and aerospace Sir Richard Evans: I think there may be something business, and they are always taking these measures, in that, although one has also got to bear in mind so if they move away, I can guarantee that will that one of the objectives of the reforms to the damage the supply chain, not just the small approvals process which was in Smart Acquisition companies, but the whole supply chain. was acceleration and the other was just reducing the number of approval points. I think if the MoD can Q63 Rachel Squire: Can I ask you whether you feel keep its emphasis very much on trying to keep to a there are adequate mechanisms in place with the minimum the number of times in the life of a project MoD to make sure that your voice gets heard and at which it has to go up the line for approval, that that you get the access to influencing the would be a big advantage and that is just a slight, if acquisition policies? you like, qualification to my agreement with you on Mr Frost: I think there are. We have made huge that point which you have just made. progress, but more co-ordination perhaps would be Mr Prest: Perhaps to add something, again this is beneficial between the various initiatives within something of a work in progress. If you look at the MoD. way it has been practically administered, increasingly review points of one sort or another are Q64 Rachel Squire: Finally, can I ask whether you being introduced between initial gate and main gate, consider that Smart Acquisition is currently being whether it is in the form of a review note, but implemented below the prime contractor level? something which actually triggers further Mr Frost: I saw this one coming and I actually asked commitment and has to be reintroduced into the my colleagues in the company today and they gave approvals process at some level or another, so in me an update. It is a bit of a curate’s egg. It depends practice I think the administration of it is becoming very much on which project team you are dealing more flexible to meet the requirements of diVerent with as a smaller, direct supplier and I guess that is projects which, as you say, are varied. probably the same experience with the larger companies, but progress is being made. The Q67 Mr Jones: Can I change the subject yet again to attitudes have improved greatly, though I think the the issue of FRES. We had the Chief of the General mechanisms could still do with some honing, but yes, StaV before us and he said that it was most progress in the right direction. important procurement programme for the Army and clearly it was very important to regions like the Q65 Mr Viggers: The Chief of Defence Procurement north-east and areas like Telford in Shropshire as stated in a recent article that the principles of Smart well. What is your view of the way that this project Acquisition had not always been consistently has been taken forward and do you agree with some applied and he made two comments, one of which is commentators who say that it has been paralysed by that the approvals process needs streamlining, and analysis? Finally, do you think that the in-service he also said that the links between government and date of 2009/10 is actually achievable because I have industry were not as open as they should be. asked this on numerous occasions now in written Neglecting the second of those, can I ask on the parliamentary questions and also of Ministers and approvals process whether you think that the senior oYcials who still keep saying that this is the concept of the initial gate and main gate is good one? date they are working towards. Is that an Does one size fit all and is the approvals procedure achievable date? one which you find broadly satisfactory to your Mr Prest: This is a subject obviously I know businesses? something about, as Chairman of the company Mr Howe: Just to start the ball rolling on that one, as which has perhaps largest interest in the particular you may know, I joined Thales from the MoD about project. I think you have to go back a bit and it is three years ago and looking into the MoD from worth just reflecting on the fact that in the armoured outside, I think that the slowness of the approvals vehicle area I think it is fair to say that the MoD has process and the extent to which companies exist in a had particular diYculty in formulating its state of uncertainty for some time while they are requirements, launching procurement programmes waiting for decisions, a process which is often very and then sticking to them, and there are various Ev 18 Defence Procurement: Evidence
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost reasons for that, I think, but it is not necessary to also been diVering opinions as to how it should be dwell on them in this forum. In a sense, the FRES is handled from a procurement point of view which has a successor of three other attempts to get this taken a bit of time to sort. I suspect there have also programme launched which probably go back to the been some problems in assembling the funding lines. late 1980s to a project for a Future Family of Light- This is all corporate speculation. There has been no Armoured vehicles which did not get oV the ground oYcial output from the MoD on the reasons for the for various reason, then in the early 1990s there was delay, but those would be the three most a project called ‘TRACER’ which was for a new prominent causes. reconnaissance vehicle which ended up being cancelled and in the mid-1990s they launched a programmed called MRAV (Multi-Role Armoured Q69 Mr Jones: Your company were doing the initial Vehicle) which also ended up being cancelled, so it is work. What reason was given to you for stopping not a happy story in general. FRES as a programme that work and then putting it out to a systems house? is designed on a number of levels. Firstly, it is to Mr Prest: There were a number of reasons. The most replace some existing vehicles in the Army infantry important reason was that the MoD felt that they which are now 30 or 40 years old and becoming did not want to restrict their options in any way for obsolete, in some cases because of these programme how they might tackle procurement in development problems. It is partly a replacement programme. It and production. Secondly, they felt that if they is also to fulfil a new concept which is of a self- launched the assessment phase with contractors who contained medium force, which the Army does not had a vital interest in development and production eVectively have at the moment, which would fall that might compromise their ability, for example, to between the heavy armoured force and the light run a full international competition for the project at forces. It is also going to be a feature of the new the development stage, if that is what they elected to network enabled warfare that the three Services see do. I think the second factor was they felt that they going forward. So it is a project that has a number wanted access to the best ideas they could find that of diVerent strands and some of the problems of would feed into this project from around the world preparing for FRES have revolved around trying to and that to use an independent systems house would disentangle those diVerent elements of the project give them a better chance to do that than if they went and saying, “Where do we put the emphasis? How through a company which had competitors around do we trade oV between them?”, and so on. It is a fact the world who might not necessarily be willing to that the FRES IPT was formed in early to mid-2002. oVer up trade secrets, and I do not think they are It is now the case that no assessment phase contract right about that, but that was their view. Thirdly, the can be launched before the end of this year. It takes nature of the work at this stage is such that it has two and a half years to launch an assessment phase; quite a high level of operations analysis, a system of I would argue that is unnecessarily long. However, balancing work in it somewhat of the nature that by coincidence, a statement was issued today about MoD used to do itself internally and they felt that the launch of the FRES assessment phase and that work could be very readily accomplished by a presumably the various Government approvals are systems house, with really the other elements of now in place for it. Obviously we welcome that and platform expertise and specific equipment expertise we will work energetically to get on with it. There has being fed into it. been an unnecessary delay in my view in launching the programme. Your second question was about the ISD or was that the third question? Q70 Mr Jones: In terms of the work that you as a company already have carried out at considerable cost to the MoD, what has happened to that work? Q68 Mr Jones: It was really about paralysis. I would Mr Prest: Obviously it has informed the MoD’s be interested to know where you think the delay has planning for the project. been. The answers that we keep getting on this keep changing certainly in terms of what you were saying earlier, that FRES is a family of vehicles, but there Q71 Mr Jones: At what cost? stills seems to be vagary about what FRES is going Mr Prest: I do not know if I can put a figure on the to be or mean. In terms of the skills of jobs both in oYcial record. I think you will have to ask the MoD. the north-east and other parts of the UK defence Your third point was about ISD and that is a very industry, it is going to be very important that those important point. I think it depends. At one extreme delays do not continue. they could go about this project by buying an oV- Mr Prest: I think the MoD has taken some time to the-shelf product via a non-competitive route, that formulate the business case and get it through the would probably be the shortest way to get an ISD, approvals process to get the assessment phase but it might not give them an ISD of something that launched. The reasons for that fall into a number of necessarily fits the bill in the longer term, so they areas. There have been some diYculties in assessing may well not do that. The other extreme would be to what the requirement is that they are trying to have a full development programme selected by full answer, I think that is one of the questions. It is competition and that would be the longest route. somewhat of a chicken and egg problem because the Depending on what they do, I think the ISD can assessment phase is designed partly to clarify that, vary between sometime perhaps not very long after but a lack of understanding at this stage of the 2009 and a date quite a long way after 2009, that is requirement has been a delaying factor. There have the current reality. Defence Procurement: Evidence Ev 19
5 May 2004 Sir Richard Evans, Mr Nick Prest, Mr John Howe and Mr Simon Frost
Q72 Mr Viggers: The National Audit OYce, in its problems because they have still got to be budgeted Major Projects Report for 2003, reported for as requirements. My guess is, out of all the substantial in-year cost increases and time slippage, contributors towards the current problem in terms but it pointed out that the Smart projects under the of savings, the biggest single saving is programmes new form of procurement showed less cost variation being pushed to the right. and time slippages, on average, than the older projects. Is this better performance on the Smart Q74 Mr Viggers: Any other contributions from the projects likely to be because they are more recent other witnesses? projects and the Legacy projects tend to be longer Mr Frost: I think the issue on Legacy programmes is tail, or do you think there are some advantages in important. My reference earlier to fear in the system, Smart procurement? fear of change, applies particularly in some of those Sir Richard Evans: I think there are clearly areas where there are large support costs which advantages in Smart procurement if we can make it could be addressed by the supply chain at large. On work and apply it properly and consistently across occasions I think the MoD shy away from some of all of the programmes, but if it is not doing that then the more innovative solutions to saving money in why the hell are we doing it, we should find some those areas. That is not a generalisation, there are alternative. I would come back to the point that time specific cases, but there are some big bucks to go at will tell. I am not very keen on this definition of in the Legacy area and some ideas around which will Legacy programmes myself. In due course those save some money. programmes that have been launched when Smart Mr Prest: Who was it that said it was too soon to tell procurement came into being will themselves be whether the French Revolution had been a success Legacy programmes. At that point in time people or not? will make a judgment. If you look back over the last Mr Howe: Mao Tse Tung. two or three years in terms of both really major Mr Prest: I would say it is similar with regard to programmes that have been launched, it is pretty Smart procurement. It is a long-term business! early in the cycle to tell. Even if you go back five or six years, it is still pretty early in the cycle to tell, but Q75 Chairman: Now that we are quoting history, in there are clear indications that where you have the my A-level examination I had a question in history integrated teams working together there are serious which said there are no revolutions. Maybe the benefits that are beginning to accrue from it and we revolution we are apparently going through is not want to continue to support it. one at all, but that remains to be seen. Thank you all very much. In particular, Sir Richard, thank you. I Q73 Mr Viggers: There have been delays and there am not sure whether we will be calling upon you have been overruns and the budget is relatively again before your retirement. You look remarkably finite. Where does the shoe pinch? Are programmes young for all the pressures you are under. I am sure creeping to the right, are programmes being you will not retire, you will merely metamorphosise cancelled, or is the Government trying to shape into some other aspect of the defence industry. down some of the costs of current programmes? Thank you very much for your contribution today Sir Richard Evans: I think it is a combination of all and over many years. Thank you all for coming those. Had some of these programmes—and FRES before us this afternoon. is a great example of this—been launched at the time Sir Richard Evans: May I thank you, Mr Chairman, at which they were initially projected for they would and all of your colleagues, including those who have be covered in the budget. The fact that they are had to leave early, for their forbearance when sliding to the right actually takes the pressure oV the listening to our answers. immediate budget, it does not solve any of the Chairman: Thank you very much. Ev 20 Defence Procurement: Evidence
Wednesday 12 May 2004
Members present
Mr Bruce George, in the Chair
Mr James Cran Mr Frank Roy Mike Gapes Rachel Squire Mr Dai Havard
Witness: Sir Peter Spencer KCB, Chief of Defence Procurement, Ministry of Defence, examined.
Q76 Chairman: Sir Peter, welcome. I do not know Q78 Chairman: Have you charted a route, a road what it is but whenever there is a sniV of money the map, although it is an abused term? Do you think place fills up extraordinarily. You can talk about you know the route for better performance to break policy, Iraq, nobody comes, but the moment away from endemic poor performance? procurement is on the agenda it is like Wembley Sir Peter Spencer: Yes, I do. I have grossed this thing Stadium in the old days. Thank you very much for up in terms of overall figures. That conceals, of coming. Is there anything you would like to kick oV course, areas of quite outstandingly good with before we start with the questions? performance but, unfortunately, the impact that Sir Peter Spencer: I guess just one statement, which those projects have had has been masked by is that when I appeared before you last year I had problems elsewhere. My starting point was whether been in place for about three weeks and you asked or not the results which were declared for the Agency me to give an indication of what I planned to do, at the end of 2002/03 were a blip or an indication of which I have done in terms of a period of personal something more systemic and more worrying. The due diligence, examining the performance of the result of the analysis demonstrated that we really Defence Procurement Agency, analysing the had quite a lot to be concerned about. There were underlying causes of poor performance, which I some warning signs there. We had a lot of found to be endemic, and have proposed a fairly corroboration from work done by consultants in the major project to reinvigorate the Smart Acquisition form of McKinsey and also by the National Audit reforms which have delivered a lot of benefit OYce, with whom we had been working very closely, compared with the previous arrangements, but still and my own people, who are very competent in this have some way to go. I sent you and the Committee area and themselves were frustrated by some of the a note to that eVect earlier this year.1 problems that they faced. There is a good level of consensus, which is encouraging. I think if you remember your own remarks last year, Smart Acquisition from time to time needs to be refreshed, so we are not trying to get to a theoretical end state, just to say that the time has come to move on and up Q77 Chairman: Sir Peter, I have been on the Defence our game fairly substantially and quickly. Committee since 1979 and every time we talk about procurement, new initiatives are designed to solve Q79 Chairman: We wish you good fortune in all of things, and then a few years later they are replaced our interests. You said in the foreword to the DPA’s by another new initiative. If you say that poor Annual Report and Accounts 2002-03 that: “2002- performance was endemic, can you just outline, 03 has not been a good year for the Agency as because we will come on to it later, what you have measured by its corporate performance”. You said identified that has led you to conclusion that poor the DPA had failed to achieve its targets on performance was endemic? Do you mean in the programme slippage and cost growth. On taking Agency or among the defence contractors or the over the DPA in May 2003, how surprised were you Ministry of Defence, or all and sundry? at the scale of the cost increases and time slippage on Sir Peter Spencer: I think if you define “poor” as major equipment projects? You will have read failing to meet our targets it means a shortfall National Audit OYce reports endlessly, as we have, against that. It does not mean to say that it was you were successful in your interview, were you a worse than it had been previously, and in fact it had little bit shocked at what you saw and how long did got better but it was not good enough. It is the whole it take before you felt you had got a handle on what of the procurement process. I think the best way to the problems were? start is to take a hard look at yourself in the mirror, Sir Peter Spencer: I was not shocked because I had decide what needs to be done to put your own house seen emerging signs of this before I took up the post. in order and then you are in a rather better position I was fairly clear in my own mind that we either had to persuade other people that you cannot deliver the a one-oV problem with a year of bad results or we outcomes independently of corresponding action had something which was more fundamental, so the both within industry and within the rest of the focus of attention was really to examine the Ministry of Defence. underpinning evidence. I guess among the things that were very telling, one was the fact that although 1 Ev 65–76 you could draw a conclusion that Smart projects Defence Procurement: Evidence Ev 21
12 May 2004 Sir Peter Spencer were doing considerably better than so-called Q80 Chairman: If 2002-03 has not been a good year, Legacy projects, there was also an argument that are you expecting the DPA to meet the targets said the majority of those Smart projects were at a relating to programme slippage and cost growth for rather earlier stage in their total cycle and that if you 2003-04, or when we see you next year when the looked back on the projects which had completed, NAO produces its annual report will you be very often a lot of diYculties emerged as those reporting similar in-year cost increases and time projects had approached their originally planned in- slippage for 2003-04? service dates, a point we had not arrived at on the Sir Peter Spencer: My judgment is that there will be Smart projects. That was a very clear warning not to a problem next year. It is unlikely to be quite on the assume that the forecasts to completion were going same scale as 2002-03. It would be surprising if that to be good for those youthful projects simply were not the answer given that there is a systemic because they had been badged as “Smart”. One had problem and it is going to take time to sort this out. to look at the underlying collateral which supported It is a bit like if you have got a batting average of five those forecasts. Secondly, I discovered that there and you have played 20 games, trying to increase was a misunderstanding across the Ministry of your batting average with a few high scores over the Defence as to what project leaders were expected to next four games is quite tough. You are carrying the deliver. This was because the way an approval was totality of the statistics with you. I am not trying to given for cost and time was to say that we approve make excuses here; I am just trying to create realistic the latest acceptable or the highest acceptable, which expectations. This is something which needs to be was a 90 per cent probability, and the understanding tackled very fundamentally. We need to make sure among too many people was as long as you did that that people give us honest forecasts because the you were successful. The Department actually plans worst way of getting out of this is simply to hoard up on the 50 per cent, or expected values. To simplify it, bad news until after you have gone and then to say you had a project which was expected to run somebody else comes along and uncovers it inside a for five years and you approved it at six years project. One of the things which I was very clear on because you allowed one year as the contingency or with the integrated project team leaders this year was we eVectively had an amnesty to say “If you have got risk diVerential in time, people were tending to say some things you need to get oV your chest, this is the “as long as that comes in in six years that is year to do it” because I need to have a baseline successful” but everybody else had planned on five. against which I can credibly start comparing So the front line commanders were expecting new performance as we go forward to see if what we are equipment to arrive, the Principal Personnel OYcers doing here is genuinely delivering the improvements were training people up for that new equipment, the that we believe that it will. If I can give you an Defence Logistic Organisation were expecting to run example: I would open a project and see that an in- down some old equipment and get it out of service, service date might be marked at December 2005 50 so we had this sort of repetition of the cycle. In cost per cent, the 90 per cent would be January 2006. I terms it is even worse because that money which was would say “That is not the world I inhabit. Here is V e ectively put aside for a rainy day to cope with risks my £10, where is your £90” because that is a 9-1 on and things that went wrong in too many cases was bet. Do you see what I mean? It is an even bet if it is being used to fund enhancements to capability, so it 50 per cent, at 90% it is 9-1 on. What I then said was was being spent as pocket money as opposed to “Let us have a look at the underpinning collateral. being spent for the purposes for which it was Is this a wet finger guess because we have demanded intended. If you have got that widespread three point estimating, or do we actually have the misunderstanding that can only be something which real detail underpinned by the three point estimating needs to be addressed by the leadership in setting techniques which have been developed over some very clear direction. When people say “how do you years now and has it been independently verified by expect me to come in at 50 per cent?”, the answer is the people on the site who are the experts in this?” very simple, one of the key principles of Smart We have had a year of confronting reality. My Acquisition which we have not been applying mantra was first of all let us get real, then let us get properly is the routine trade-oV between engaged and then let us get on with it, because it is performance, time and cost, and you should have a urgent. That was the get real. Getting engaged was three-dimensional trade here so that you understand talking it through and agreeing what needed to be what the cost drivers are and the time drivers and, in done and how fundamental those changes are. conjunction with your military customer, if things Getting on with it was the sense of urgency because start to get diYcult and something has come out of the thing which worried me, which does not appear the woodwork which you were not anticipating, you in my key targets, was the failure to deliver against say “we need to fall back here” and plan B is that we the planned value of assets in monetary terms do a little bit less of this because we could add that because we actually had a balance sheet which was at some later stage in the life of the equipment if it is increasing each year because we were delivering by really that important. It is the need to get corporate value considerably less assets than we were actually financial discipline so we do not have to keep on re- investing in. No company could exist like that for costing the programme every year because it has very long and we needed to focus the attention on gone over. It was those two areas, just as examples, delivering to the front line, which is the real output but there were a number more which I will not as opposed to key targets that measure our latest bother you with. forecasts promised for the future. Ev 22 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer
Q81 Chairman: It is very disappointing. We can just Q82 Chairman: It is a huge responsibility for you, Sir look on and observe and make our comments, Peter, and we wish you very well. At the end of the mainly annually, but ministers appear to be day when you retire, you will be judged on how committed to the concept of Smart Procurement. successful you have been in carrying the process You have got a fine new building down there, you forward and if tough decisions have to be made, have got professional staV, and you have a tough decisions have to be made. Obviously the competitive environment where companies bid Government is cognisant of these—I am not saying pretty fiercely to win competitions. We are do they know—rather pessimistic views that you constantly being given assurances that things are have been expressing. It would be unfair of me to ask more or less working and it comes (a) as a bit of a you about confidential discussions that you have shock and (b) as a disappointment to know that had with ministers, but do they recognise that tough things are not as hopeful as we were expecting, measures will have to be taken? hoping to get out of this cycle of failure that we have Sir Peter Spencer: They would not describe it as observed over the previous 25 years. “pessimistic”; I think they would accept it as Sir Peter Spencer: I think we are getting out of the realistic. I have absolute engagement with Lord cycle of failure. Please do not misunderstand me; I Bach, who has been extremely supportive both in am not trying to denigrate the improvements which terms of what I have needed to do at Abbey Wood had already taken place. But I cannot ignore the and what also needs to be done in the relationships bottom line. I cannot ignore those figures. These are between the DPA and other parts of the Ministry of independently audited by the National Audit OYce. Defence on the one hand and with industry on the They have to be understood and the only way to other. To that eVect, he chairs a monthly meeting understand them is drilling right down into the detail which eVectively oversees the implementation plan of finding what is happening. It is clearly not a of this reinvigoration of Smart Acquisition. The first popular message either within the Ministry of bit looks at how far I have got in rolling out each of Defence, across the procurement community, within the strands of work and how far I have got in industry, or within this place, but what is expected of measuring the benefits; the second bit looks at how me is (a) to understand what is going on and (b) to far the rest of the Department has got in adjusting to bring it under better control. It is easier to do the first some of the changes which will need to be made. thing than the second. The better you understand it, the more honest you are with yourself and the more Q83 Chairman: Will you need to make any persuasive you are with the people from whom you organisational changes, personnel changes, need some corresponding support and the more cultural changes? likely it is that we will get out of this. We have to put Sir Peter Spencer: Yes to all three. The most this in the context of what it is we are trying to do important has been the process changes. here. EVectively we manage huge uncertainties and the besetting cause in all of this is whether or not we Q84 Chairman: That is just a prelude to the actually invest enough time in de-risking before we questions that will be asked. I will ask just one more make a major capital investment. That is the single question. In the foreword to the Annual Report and most compelling reason why things go astray. We Accounts you said that: “progress on newer delude ourselves too often that we have actually projects”, ie Smart Acquisition projects, “has been understood a problem which we have not. There is a better, although there have been worrying delays strong correlation between projects that have spent and cost growth on some of those also”. Are these more time de-risking the technology, de-risking the early indicators that Smart Acquisition is failing in supply side arrangements and contractual its aim of procuring equipment faster, cheaper, arrangements and spending longer and more better? Are we going to get there? resource doing that before setting firmly the performance time and cost targets. I cannot ignore Sir Peter Spencer: They are indications that Smart that. There are seven principles of Smart Procurement in some of these projects has not been Acquisition. One had been implemented in full and implemented as it should have been. Under those is working extremely well, and that is the fund circumstances you can see quite clearly the signs of holding central military customer who then is both it. Once the projects have gone past the Main Gate approval there has been rapid consumption of the the operation requirements person, in old speak, and V also the planner and programmer in old speak. He risk di erential, both in time and cost in some cases. has to tailor his expectation according to his budget In some of those cases they are still forecasting to come inside their approvals. The question is, if you and live within his means. Of the other six, none of V them had been implemented fully and in some cases have moved o the target so much earlier on, how V had hardly been implemented at all. Performance confident are you that you are not going to move o time and cost trade-oV, which I mentioned earlier, further and come outside them. That is really the was very patchy. We just needed to refresh people’s point of what I am looking at. understanding of what we are trying to achieve here. One of the people on the site said to me, “Your Q85 Mr Roy: Sir Peter, the stocktake of Smart problem, boss, is you do not seem to believe in Smart Acquisition which you commissioned has Procurement” and I said, “Your problem is that I recommended a new organisational structure. I do, I just cannot find enough of it”. What I find is too understand that currently there are six members of much which is badged as Smart Procurement and the executive board of directors and three of those actually gets in the way. directors will take over operational duties and the Defence Procurement: Evidence Ev 23
12 May 2004 Sir Peter Spencer other three will take over functional duties. programmes? We needed to provide that level of However, there is also an addition of six newly support to the team leaders. It still gives people a big created deputy operations directors. I am a bit span. If you are running 25 projects, and some of worried, for example, that it could be perceived that them are the size of medium-sized businesses, they the management of DPA will now become extremely have their own sets of accounts, their own budgets top heavy looking or, worse, an accusation could be of billions, you need somebody there who is going to made that it is a ‘jobs for the boys’ exercise insofar provide the support. as we have got another six to 12 and on the face of it that does not look like very Smart Acquisition to me. Q90 Mr Roy: Were there not enough people there How would you allay my fears? beforehand? You have just said you are keeping 75 Sir Peter Spencer: Two fold. If I start where we were and there are going to be six directors and six deputy before 1 April this year: 75 integrated project team operations directors which seems to be extra. leaders were reporting directly to me and that is a Sir Peter Spencer: No, those are not extra. We used very large span of management. If you recall, the to have people called support directors who had Committee asked me last year whether or not I felt grown out of the previous system which was a bit of there was enough senior management attention a hybrid. The function of support directors was in being given to the performance of these project part to assist the team leaders but they did not feel teams. My judgment was that the key to all of this any personal accountability for the performance of was performance management and strengthened the projects they were supporting. corporate governance because, as I said earlier, we basically manage uncertainty. We have to have an Q91 Mr Roy: How many were there? integrated process which manages programme and Sir Peter Spencer: There were six. They are not the risk as an integrated activity for each project, and same people because we re-competed. One is the also at the Agency level. We started oV by same. recognising that the executive directors had a very large number of cross-cutting capabilities, so many that they were hardly ever available to discuss things Q92 Mr Roy: Have you still got six support directors with the integrated project team leaders when they as well? needed somebody to go to and talk to as a sounding Sir Peter Spencer: No, the support director function board. The construct we have at the moment is the has disappeared. We got rid of those on 1 April. We delegation of performance required and the had six deputy operations directors and we resources which are given still flows from me directly competed each of those posts. As it happens, one to the team leader, but the role of the operations support director was successful in winning a post. director is team mentor. Q93 Mr Roy: Just allay my fears here. Those six Q86 Mr Roy: Can I just stop you there. There are support directors, as they used to be called, are not still 75 team leaders? the same people who are now called deputy Sir Peter Spencer: Yes. operations directors? Sir Peter Spencer: We had the resource, we had the Q87 Mr Roy: Still the same amount. funding, for six posts which were called support Sir Peter Spencer: Thereabouts. It might be 74. directors. We got rid of those and we used the money to fund six new posts. As it happens, one individual used to be a support director and was successful in Q88 Mr Roy: Do not worry about it. winning. Sir Peter Spencer: The role of the operations director is not David Beckham being the captain of the team; it is Sven-Go¨ran Eriksson being the team Q94 Mr Roy: He is now an operations director? 2 coach. Sir Peter Spencer: Yes. yn Mr Roy: Who is he? Q95 Mr Roy: This is not jobs for the boys? Q89 Chairman: If we are not careful we will hear a Sir Peter Spencer: No. We had 39 people competing Scottish success story being told. for these jobs and we went for people who had a Sir Peter Spencer: I did not want to oVend you by track record of success in delivering projects, so they getting into rugby and cricket, so one struggles. We had something to bring to the party. In other words, need to be very clear here. This is not reinventing the they knew how diYcult this job would be and they old multi-layered structure of the old Procurement would be people who team leaders would want to go Executive before it became an Agency, it is actually to and use as a sounding board and talk through defining the role of those three operations directors issues and listen to. to provide the challenge and the advice and support to ensure that programmes are on track because you Q96 Mr Roy: Now we have got the party, specifically have to ask yourself with some of these very big how will the reorganisation that you are now going failures which occurred, why did they suddenly to have lead to improved performance in the delivery appear to come out of a clear blue sky? Somebody of projects and when can we expect improvements to must have known. Why were we not actually asking be seen? to see the collateral which supported a series of satisfactory estimates in terms of time and cost of 2 Note by Witness: A Deputy Operations Director Ev 24 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer
Sir Peter Spencer: The reason we expect to get better Q101 Mr Roy: Yes. performance is because there is a much more Sir Peter Spencer: It comes to 700 programmes and rigorous process of assurance now in terms of there are decreasing returns on that. examining the status of projects at all stages of their cycle. In other words, once a project is actually in its Q102 Mr Roy: Sack two deputy operations main demonstration/manufacture stage, there is a directors! much more rigorous performance review process Sir Peter Spencer: There is a good deal of diVerence held on a quarterly basis against a standardised set between having that data independently validated of parameters which are, in the main, independently by the National Audit OYce for 700 programmes verifiable by experts on the site who will then provide than for 70. That other work does get picked up. We that independent assurance both to the team leader have now promoted the delivery of the assets by and to the ops directors. For example, the technical value against the asset delivery schedule for the risk areas merit a particular level of assessment Agency as a whole to a key indicator as well. We because they have been looked at. We will look at a have got some more conventional commercial whole range of these parameters, both in terms of eYciency performance parameters which are technical, financial and commercial aspects. This measures of productivity which have been worked will be particularly important in leading up to a up. I ought to say that whereas in the past we had submission to go into the Main Gate in order to been reporting movement against the 90 per cent make the capital investment decision because there estimates, we are now going to report movement has been too much variability in terms of the level of against the 50 per cent estimates because that evidence that has been forthcoming to support the measures the heart of the problem in terms of getting fact that a project was mature enough to go through defence right. All of that motivates us to deliver the the Main Gate. things properly.
Q97 Mr Roy: My question is when can we expect to Q103 Mr Roy: What is the mechanism that you have see it? put in place that will identify the best procurement Sir Peter Spencer: In terms of how long it takes, we practice? have put forward a revised set of key targets to Lord Sir Peter Spencer: In terms of procurement practice, Bach, who will announce them shortly, which are there is a whole range of other strands at work. I will designed to track the improvements over the next just go back one. We will spend much more care, four years. I would hope to see some improvement much more intellectual eVort and more financial starting next year in terms of the value of the assets. resource in the assessment phase and be much more rigorous at independently verifying the degree of Q98 Mr Roy: Just to be clear in my own mind, that maturity of a proposition before we make the capital announcement that will be made shortly? When? investment decision. Historically we have spent as Sir Peter Spencer: I think it is the end of this month. little as two per cent of the total budget. For what it It is part of the routine process by which the Agency means, the average figure considered best practice is targets are laid in the library of the House. Under about 15 per cent and we are currently on around 4.4 those circumstances, in conjunction with the per cent. Then there is a whole strand of work, in Y National Audit O ce, we have looked at getting a conjunction with industry and benchmarking from more appropriate set of key targets, which are not best practice in the civil sector, improving much easier, they are tougher and more representative of better contractual arrangements which we believe the work which we are doing. The end of May or will deliver better outcomes, not only for the early June is the normal time of year they are Ministry of Defence but also for our suppliers. actually formally posted. I am sure Lord Bach will not mind me telling you the sorts of things which we are looking at. One is instead of the targets for Q104 Mr Roy: Just on that point, what examples can slippage being limited just to the top 20 or so you give us where you have identified best projects, which is not entirely representative of the procurement practice elsewhere and incorporated volume of business we do, it will be all of the Cat A, that into the DPA’s new arrangements? Cat B, Cat C projects. In other words, 65, 66 by Sir Peter Spencer: These are not all new. Some of the value of the work which we manage will now be ones were there already in terms of de-risking. Some measured by those targets. of the PFI projects which we have done, if they are being underwritten by third party financiers, spent a lot of time in due diligence, they virtually never miss Q99 Mr Roy: Is that 65 per cent of the work you do their in-service dates because they make quite will be measured? certain they protect their money. We have to Sir Peter Spencer: Yes.3 emulate that due diligence and protect the taxpayers’ money with the same care that a banker protects his Q100 Mr Roy: What about the other 35 per cent? or her money. Secondly, we have looked at things Sir Peter Spencer: In terms of slippage? In terms of like the 2087 sonar project where about 14.8 per cost and time slippage? cent4 of the budget was spent in putting a prototype to sea of this brand new low-frequency active sonar, 3 Note by Witness: The targets for cost, time and performance will be based on the 63 largest projects by value which have examining the structure of the stern of a Type-23 passed their main investment point (Main Gate) but not entered service at the start of the year. 4 Note by Witness: The actual figure is 12.1 per cent. Defence Procurement: Evidence Ev 25
12 May 2004 Sir Peter Spencer frigate and making certain that all of the risks were the process”. What is your assessment of how the understood in terms of maturing individual Defence Industrial Policy is being implemented technologies and the system integration risks were through the procurement process and what more do understood. It was very much easier then to come to you think needs to be done? an agreement as to how much work was involved Sir Peter Spencer: His answer, of course, has to be and it has worked out well both for the supplier and correct. I would simply say that I believe the process for us. The other area we are looking at is partnering has already started, and I can demonstrate that, and arrangements and certainly partnering it will gather momentum over time. Everything I arrangements not only in terms of providing services have done in the stocktake, if you read the Defence but also partnering arrangements in terms of having Industrial Policy, plays straight into that. We have a less taut contracting arrangements than we have lot of engagement with industry. We are spending been used to applying in the past. Sometimes we time with them working out better and more apply them anyway, target cost incentive constructive contracting arrangements. We are arrangements whereby we find the point at which we looking to improve to mutual benefit the processes think there is a sensible target to aim for and we for competitive arrangements. We have been incentivise our suppliers to beat that target because working hard on the question of opening up markets then they share in the cost under-run with us and both in the United States and within Europe, and we they get a higher percentage return as profit. They know the Head of Defence Export Sales through the are not always easy to set up but in the main, if they forum that he runs has been doing a lot of really fine are well set up, they lead to much more harmonious work. In terms of the question of building, working relationships and much better outcomes. nurturing, our own industrial base, a lot of work has been going on building upon something I mentioned Q105 Chairman: Does it mean that the National Y to you last year, the RAND Study in the surface Audit O ce is going to be producing a report which shipbuilding sector. We have been doing a number will be much, much broader than their 20 Major of studies on other industrial sectors. On 19 May Projects Review? Do they have resources to get next week when the National Defence Industries beyond that 20? Council meets under the chairmanship of Lord Sir Peter Spencer: I cannot speak on their behalf but Bach, the Ministry of Defence will be explaining to we have discussed this with them. I have been given no reason to believe that they consider this to be an industry how the overall processes are going to work insurmountable problem. It does not mean to say in order to pick up some of these detailed strands that they will not concentrate on the top 20 for the and play them through. So far as the individual Major Projects Review, it is just that in terms of procurement decisions that are being made, the validating the performance against key targets they factors that we have said would be taken into have shown a willingness to audit a larger number account in that Defence Industrial Policy are being of projects. taken very carefully into account by ministers.
Q106 Chairman: Perhaps we should write to the National Audit OYce and ascertain what the scope Q109 Mike Gapes: As you know, the Defence of their future studies and publications is going to Industrial Policy is based on policy being driven by be. We do not waste too much sympathy on whether the need to provide armed forces with equipment the Public Accounts Committee has to be working which they require on time and at best value for harder, that is their problem. money for the taxpayer. Sir Richard Evans in an Sir Peter Spencer: As I understand it, they will still article recently said that we needed an agreement publish for the MPR the top 20 and then the top ten between Government, industry and the UK on what pre-Initial Gate. For auditing of the key targets, they we all really mean by value for money. What would will audit in detail the top 20, they will sample audit you say we mean by value for money? from the other 45 or so. Sir Peter Spencer: The definition that you have given serves pretty well. The question is how you calculate Q107 Chairman: That seems very sensible if they that parameter for a given project. The way in which have the resources. It is manifestly absurd to me to we do this inside the Ministry of Defence is to take focus exclusively on the top 20, even though the a look at the options which are open to us and if it is value of the top 20 is a high percentage of something very simple, and as long as it works and Government spending, and we are oblivious of any has a certain reliability, and it is easy to define its deficiencies in the procurement process vis a vis those performance parameters, we might go for the lowest smaller processes that are oV the radar screen. compliant tender. That very rarely operates in the Sir Peter Spencer: You do not hear about the world of major projects. There we are looking at a successes either. complex equation of how you balance the various components of operational eVectiveness against the Q108 Mike Gapes: I would like to ask some money you will be invited to pay, and we have a questions about the Defence Industrial Policy. We fairly sophisticated procedure or process to develop had the Chairman of BAE Systems before us last something called a combined operational, week and he told us that the Defence Industrial eVectiveness and investment appraisal. Policy “is a good start but it is absolutely not going The Committee suspended from 3.53pm to 4.02pm for to make progress until people implement it through a division in the House Ev 26 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer
Chairman: Sir Peter, as we are humble infantrymen would be much easier, but the recommendation did we do not know whether there will be another vote not go to buy a specific aircraft to ministers. That is very quickly, in which case I apologise in advance as far as I am able to go. because we will have to disappear again, but fingers Mike Gapes: Can I try another way. Were you in crossed there will not be another division. Mike? favour of Hawk? Chairman: That is a very poor alternative approach! Even I can see through that one! Sir Peter is not Q110 Mike Gapes: I was in the middle of asking, and going to give way. I must say, when I asked his you were in the middle of answering, a question predecessor on how many occasions advice which about value for money and definitions. had been given by him was rejected by ministers, he Sir Peter Spencer: I talked about the cost of said, “I can’t remember”, so he took a very similar acquisition and said you obviously have to factor in approach to Sir Peter, ie “I’m not telling you.” I am not just the initial cost of acquisition, it is very afraid that is a line which is not going to be pursued. important we do it on a through-life management Mike Gapes: Can I go on to a more general question basis and we are looking at the whole life costs. In then, if you allow me, Chairman? amongst that, we then factor in considerations about Chairman: Let’s hear the question first. the industrial base, a point which is very important Mike Gapes: Do you think it is good that we have because if we were to make wholly short-term situations where Secretaries of State issue ministerial decisions without paying attention to the wider directives to overturn recommendations? industrial factors we could end up losing part of the industrial base which we will need later on. So all these things need to be factored in. Q115 Chairman: That is better. Sir Peter Spencer: It is a motherhood question, is it not? He is the elected representative who is Q111 Mike Gapes: Would you agree you should also responsible to this House for the expenditure of take account of potential defence exports? money, so in terms of where the actual decision is Sir Peter Spencer: Yes, I would, and we do. taken it is absolutely the case that he makes those decisions. My job—and I invest no emotional Q112 Mike Gapes: You would not accept that the capital in this whatsoever—is to explain in a more way we define value for money is currently too general sense what the numbers will be for various narrow? courses of action. We do and we did factor in Sir Peter Spencer: Because we lay all these factors in, judgments on exports, and put that advice forward I do not see why it is open to be described as too to him. I believe that it is a good example of defence narrow. You can always question after the event industrial policy working, because if you read the what weighting was put on diVerent factors, because defence industrial policy it says, “We will address if you are going to try and combine all this into a these issues upfront before we invite competitive single number then you must have made some tenders.” So the process was thought through. Far implicit assumptions about the relative importance better than to have run a competition, come up with of diVerent factors. a result which ministers found they did not feel was appropriate, and then be accused of using companies as stalking horses in a contest where we Q113 Mike Gapes: Can I give you a specific example only ever intended to award the contract to a single which did come up last week actually, the question company. So we talk through these issues before we of the advanced jet trainer where, as I understand it, invite tenders, which is precisely what the DIP says there was a recommendation to ministers, advice we are going to do. from the DPA and oYcials—according to what we were told by BAE Systems—to opt for the Italian Aeromacchi bid, and this advice was overruled by Q116 Mike Gapes: But clearly there are diVerent ministerial direction from the Secretary of State. perceptions about value for money here. There is a Subsequent to that, there has been recently perception you have of an assessment as to what announced success in gaining an order from India, potential exports might be and a ministerial decision which presumably would not have happened for the which is clearly a diVerent decision, but in hindsight Hawk if the original decision as recommended by we can say that was probably the correct thing to do the oYcials and the DPA had been pursued. Would because of the exports to India—I do not know if you like to respond to that? they were factored into your equation or not, Sir Peter Spencer: I am not going to comment on presumably you will not be able to tell me—in detailed advice to ministers, but I can tell you that is hindsight the outcome has been a good one, has it factually incorrect. not? Sir Peter Spencer: I am delighted that we have got an export order and was delighted before the event. Q114 Mike Gapes: So it is not correct that the recommendation was for the Aeromacchi as opposed to the Hawk? Q117 Mike Gapes: But clearly there are diVerent Sir Peter Spencer: A convention which prevails in perceptions here about value for money. That is the this House is that oYcials are not obliged to divulge point I am making. There is not an absolute value for the detail of information given to ministers. If the money approach which is based upon your original Chairman wishes to take this up with Lord Bach it recommendation. There can be another view— Defence Procurement: Evidence Ev 27
12 May 2004 Sir Peter Spencer
Sir Peter Spencer: I am sorry, I— Q121 Chairman: I would be the last person to argue that duV equipment should go to the British Armed Forces because the Government is obsessed with the Q118 Mike Gapes: I just want to be clear what you creation of jobs, but in many ways the decision that are saying. We were talking about value for money the MoD would make, and you would make, has and you said, “Yes, exports are factored in.” I want wider implications that would fall within the scope to probe, how much are they factored in? Are you of other Government departments. If you make, in taking worst case scenarios? Are you taking an your view, a rational decision, “this is the best and assumption of a certain level of exports? Are you probably the cheapest bid, therefore we are attracted taking account of the wider context? by it and will recommend acceptance of it”, if it Sir Peter Spencer: I am not prepared to comment on means that other Government departments are the Hawk case for the reasons I gave earlier, but in going to have to pay a higher price as a result of your the more general case we would factor in a judgment decision then that is not strictly joined-up on the benefits of exports. The key question is, is government. I can assure you, it is not a question of there a single number which you then roll that into saying take party political decisions which are not in some complicated mathematical equation? Not your responsibility, but merely to say that the one I have seen. So therefore there are value defence industrial base has important implications judgments to be made, and judgments as to the and if decisions are made that may not advantage probability of the amount of exports which are going our British defence industrial base then there is a to be achieved, for example; probabilities of the downside to any decision. We merely recognise that extent to which you may need to have that piece of the decision making process is immensely industrial capability for some later procurement. complicated and we are trying to work out the There are also judgments made which are well factors that are taken into account. outside the procurement perspective as to the need Sir Peter Spencer: That is really the point I am trying to generate wealth in a particular region of the to make. It is not possible to reduce it to a single country. pass/fail criterion but there are value judgments. Chairman: We agree with that. We have taken a vote Q119 Mike Gapes: Would it be fair to say that the and made heavy weather of that as far as I am whole concept of value for money is itself a value concerned but things will be crystal clear now James judgment? Cran will ask the questions. Sir Peter Spencer: In many cases it will be, yes, so it is possible to draw diVerent conclusions from the Q122 Mr Cran: Certainly simpler questions than same set of data depending upon your own position Mike Gapes asked but still on Defence Industrial and what you are trying to achieve. Policy. As he made clear, on 5 May we did meet the Defence Industries Council and it is worth a read Q120 Chairman: I think the reason we are querying when this stuV comes out, if you have not already it, Sir Peter, is that Kevin Tebbit spoke to us this seen it. The Vice-Chairman of Thales-UK made it morning and the impression I had, and I shall have clear that there is a better dialogue between to read the transcript, was that his prime concern Government and industry now which is clearly was securing the best equipment for the armed forces desirable, but—there is always a but—he did go on and what the wider factors were seemed to be of to say this: “but there is still some way to go in one secondary importance. I was more encouraged by particular area which is clarity about which kinds of your response where you have factored in things industrial capabilities and ... technologies are judged other than price, etc. I am not asking you a question to be of crucial strategic importance in the long- on Hawk, merely making a statement. The irony is term”. That begs the question, what sort of Defence that, according to Sir Richard, the evidence over the Industrial Policy do we want? In the normal course Hawk decision was quite the reverse where it of events I would never ask you that sort of question, appeared that the Government took into account I would say it has to be left to the marketplace, but other factors and you did not. I am not asking for a you are the dominant purchaser and, therefore, you response on that, merely giving you my re´sume´ of ought to have a view. what I feel the possible diVerences are. I am sure by Sir Peter Spencer: Yes, we do have a view. One of the tomorrow morning those diVerences will turn out things which we are looking at over the longer term not to have been diVerences and I have made a is the size and shape of our programme, what our misjudgment of what Sir Kevin said. requirements are going to be and where we believe Sir Peter Spencer: I know that his position and mine that we need to have industry in place in order to be were identical and I saw what he took into account. able to deliver it. Under those circumstances, I think In terms of the time in which he had to do the recall, the Defence Industries Council is right and it is I know that he factored those things in as well. If I recognised, and, indeed, promoted within the take this away from Hawk and make a fundamental Ministry of Defence by Lord Bach that we need to point. If the Ministry of Defence is going to be take the Defence Industrial Policy as a starting point making this broad a judgment on value for money and deliver it into strands for strategies for key and it requires additional resource to go for one sectors of the market. As I mentioned earlier, there particular route than the other for benefits such as will be a meeting with the NIDC next week when the wider regional employment—this is not Hawk— way in which we are going to approach this will be where does that resource come from? explained to Industry. We recognise that there is a Ev 28 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer need to do that sector by sector. As I also mentioned the Government consider comes into that category; earlier, at a lower level but within the DPA I am industrial capabilities we need to keep in this concerned about understanding the nature of bits of country? the industrial sector upon which we are crucially Sir Peter Spencer: I think it is diYcult at the moment dependent. The nuclear sector is very important in to make a declaration, simply because we are still in terms of supporting the submarine building the process of giving advice to ministers so they can programme for a nuclear steam raising plant. The make those judgments. We can all think of areas surface shipbuilding sector is very important in where we currently have industry and where the terms of ensuring that we have actually got the instinctive reaction is to say, “We need to keep it in capacity, the skills and the capabilities to deliver the being”, in perpetuity perhaps, but we have to test very large programme which is planned for surface those against some criteria. The first is, are they shipbuilding, but we have got a bit of a gap in the absolutely critical to national security. The answer meantime, which is a worry, and the work is wholly for nuclear is self-evidently, yes, because it supports aimed at how we keep those key skills in place and the deterrent which the Government believes is reassure the companies concerned that we are fundamentally the backstop for national security. looking at this intelligently. That is one of the Secondly, is it imperative for defence capability, in reasons why I re-clustered the projects in the way other words are we going to need to have these skills that I did at Abbey Wood, so that we had projects in the longer term to support the front line, in other working closely together within the same technical words are we going to need to upgrade them through areas and, therefore, largely in the same industrial life and respond to urgent operational requirements areas so that we have a more cogent approach to the during operations. Then there are the wider totality of our business rather than exepecting technical benefits for the nation, do we need these individual project leaders in a rather stovepipe way skills for wealth creation, and then there will be area to bid into a market which, as you say, is dominated employment issues. The judgment ministers will by us anyway and we have a responsibility to wish to make is how they are going to weight those industry, as well as to the taxpayer, to make the most factors, bearing in mind that the message which the eYcient use of those industrial assets. You could Secretary of State gave in his White Paper was that apply the same argument in a number of other areas. the way in which defence operations and our capabilities are shifting in the future there is going to tend to be less investment in platforms because as we Q123 Mr Cran: Therefore, it would be correct of me fight with better command and control information, to conclude from what you have just said that you— knowledge, in a network enabled sense, we need “you” meaning the whole of the defence fewer platforms, we also need fewer platforms establishment as it were—do have a view on the sort because we have more precise methods of delivering of defence industrial structure this country will weapons. It is easy to say you are going to have that require in the future? shift in investment in terms of what you need in Sir Peter Spencer: We have a view— terms of capability, but we have to manage the consequences of that, and we have to manage the consequences of that ensuring we have an aVordable Q124 Mr Cran: That is what you said. programme in terms of being able to do it. So there Sir Peter Spencer: Yes. There are some things where are some diYcult questions which are being asked at we know what our future programme is planned to the moment and are being addressed, which is why be in terms of building submarines and surface ships, it is absolutely necessary for us to talk fairly closely we know what the declared policy is for building with industry to share with them our understanding those assets and, therefore, we know we need those of the position they find themselves in, to find bits of the industrial base and we need to find ways of strategies for coping with the future which may be a making sure that they survive and flourish. In other bit diVerent from what they might have imagined up areas, we are going to be working through a process until now. which takes each of the factors which were mentioned earlier in terms of individual project decisions, in terms of value for money, and take a Q126 Mr Cran: I entirely respect you cannot tell us look at how we then determine the crucial nature of in detail at the minute, and that is fine. Any timescale the other bits of the industry as to whether or not we to this consideration which is being given in necessarily need to ensure that we keep them in being Government at the moment? or whether or not we take a more free market Sir Peter Spencer: It is for ministers to judge how approach. That is going to be important work which soon they want to make decisions, but from my will be done in consultation with industry because it perspective I would like to get on with it. One of the needs to be fed by a proper understanding of the things which is absolutely necessary for us is if, for detail. example, with a particular industry we decide that we want to ensure it survives in the UK in one form or another, that may or may not be an argument for Q125 Mr Cran: In terms of the sort of industrial a non-competitive strategy. It may be an argument capabilities that we are going to require in this for a competitive strategy where we declare right at country, you mentioned nuclear in the answer you the beginning that industrial participation in high gave to my first question, could you give the quality work, ie both design and production, will be Committee any ideas of other areas that you and/or a discriminating factor in the competition. So it Defence Procurement: Evidence Ev 29
12 May 2004 Sir Peter Spencer means we can then intelligently run those sort of them out slightly because they are slightly diVerent. procurement processes with the right degree of In terms of down-sizing capabilities in order to meet consultation with other government departments, aVordability, because the budgets are constrained in particularly the DTI and the Cabinet OYce and the a particular way, that is a concern. Do you share any Treasury. of that or do you have observations on that? Sir Peter Spencer: As Chief Executive of the Defence Q127 Mr Cran: Do you think it is important, and do Procurement Agency I respond to the needs of the those whom you speak to think it is important, that fundholding customer. He tells me what his the UK should have a defence company that can priorities are, asks me for an initial estimate of what take on the role of, I think it is called, prime I think the resource is he is going to need to deliver contractor for these major projects? That is an it, we then engage in a series of studies to iterate until interesting question against the background of the we home in on a range of options for how we can speculation we saw in the press quite recently about spend his money. One of the most important things the Carrier programme, where one particular which is right at the centre of my thinking, and I have company was saying that it thought it was the prime emphasised endlessly to my people, is that we have contractor but it had the role taken away from it. to deliver on time and on cost otherwise we become Sir Peter Spencer: Which question would you like part of the problem as opposed to part of the me to answer? solution. The mission of the Defence Procurement Agency is to equip the Armed Forces. Do we achieve Q128 Mr Cran: Both. Do you think we need a prime it? Answer, yes eventually. Time is money. What we contractor company for major projects or not? do need to do is make sure we equip the Armed Sir Peter Spencer: I do not think the case is made for Forces on time because on time is on cost as a having a single company to be the prime contractor generality. In terms of whether or not there is for every major programme that we run, because we enough money to deliver the capabilities, that is formally the responsibility of General Fulton who would then not be complying with the bedrock of th Defence Industrial Policy which is competition. But will be appearing on the 25 . It really is core in terms the level at which we compete and how we compete of how he judges his ability to fund the capabilities needs to be done on a case by case basis. So to sign which are needed to be consistent with the declared away on day one that all business will go to a Defence Planning Assumptions. national champion, prime contractor for all complex systems, is not something which is a Q131 Mr Havard: On the second part of it, which is compelling case. That does not mean to say we the business about having the budgets to deal with would rule out the companies which are capable of what has already been committed to, as it were, the being prime contractors, and there are more than industry seems to have some concerns about that one. As far as the Carrier is concerned— aspect currently. Are they right to have concerns in that area? Q129 Mr Cran: You do not need to answer that, it Sir Peter Spencer: Industry has an agenda clearly. It is coming up later and I would not want to steal the would like us to spend more money on industry and questions on that. What you are saying to me very ministers form a judgment with their Government clearly is you would ask the question on a case by colleagues as to how much resource they need to case basis but you can see prospects where a prime fund the defence outputs which have been agreed contractor role would be useful? and I am not in a position to make a personal Sir Peter Spencer: It rather depends on the form of comment on that. All I would say is that I think contract that you are engaged in and how you define industry is in agreement, certainly all of the senior prime contractorship, but there are many cases in chief executives and chairmen in industry that I have which the traditional prime contractorship will work spoken to are in agreement, and there have been a lot extremely well, and in other cases where there are over the last year, that we need to work better ways of doing the business which are variations together to make better use of the money that we are which are tailored to meet rather diVerent being given already, we are in this together. I do not circumstances which we found diYcult to cope with point the finger at industry. We are chained together in the past. at the ankles really on this and we must be jointly accountable. Q130 Mr Havard: On the Defence Industrial Policy, this is a set of questions about budgetary processes Q132 Mr Havard: Maybe you share my interesting and how they impinge both currently and in the observation which is all of these questions come at a future on that. The Chairman of BAE Systems was time of expansion and that is very interesting in giving evidence the other day and he made a series terms of the money that is available. I wonder what of statements, one of which was questioning whether they would be saying in other circumstances. I have there was suYcient money to sustain the current one other area of questions which are slightly commitments. Essentially he was questioning technical questions in some respects as to what the whether or not there would have to be a down-sizing eVects are of the resource accounting and budgeting of capabilities in order to match aVordability, and processes that have come in and how that is both of these things were essentially coming from the constraining or aVecting your ability to meet fact that the budgets were not of suYcient size and equipment projects. What are your observations commitment to achieve that. If we could separate about the deployment of that as a process? Ev 30 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer
Sir Peter Spencer: The fact that under resource your assets went up by a billion, say, because you accounting and budgeting, I am charged interest on would simply demonstrate the ineYciencies of what assets in the course of construction— is going on. It is a very powerful indicator that something is not right in the organisation and leads Q133 Mr Havard: You made the point about putting you in the right direction that you have to roll your things in as a key indicator earlier in the new process sleeves up and do something practical about it. that is coming up. Sir Peter Spencer: The fact that I am charged interest Q135 Mr Havard: Sir Richard eVectively was saying on assets in the course of construction is an incentive that given the budgetary processes around for me to deliver on time because if I have budgeted commitments and all the rest of it, in terms of for the interest on capital expenditure over a certain modern business the MoD would be as close as period and we run on over time I then have to find having to go to the liquidators because of the way that money, or rather I have to go back to the the processes were run but you are taking a bit of the military customer and say “I am afraid we are going invective out of that. Are you saying to me that in to have to try to find headroom to fund this cost terms of the processes you have put in place, and you overrun”. In itself, it is a good discipline because it answered my colleague’s questions earlier on about confers on the people doing the procurement in the how eVectively you are putting in management public sector the same disciplines that the people processes, providing sources of clarity about face in the private sector. It was not so very long ago particular projects for your purposes but also for the that quite senior people in the Ministry of Defence purposes of industry, you are putting these would simply not agree the proposition that time is disciplines in place along with new budgetary money because it was not their money, so we had this disciplines, is it really the case that industry does not disconnect with industry. Now we actually face the really understand the process that is now being problem from a very similar perspective. applied in perhaps the way that they should and, therefore, make the statements that they make Q134 Mr Havard: We have read lots of stories, and because they see the wrong question? It is more to do you will have seen them, that there are savings with their ability to respond rather than yours. What activities having to be undertaken, partly being is being said about that because they hold these driven by the discipline of resource accounting and perceptions very, very strongly? They come from budgeting or maybe insuYcient budgeting, in order somewhere, so whose is it? to achieve commitments already given. Do you have Sir Peter Spencer: I answered the question from the observations to make about whether it is the process point of view of capital expenditure inside the or not? Defence Procurement Agency. There has been a Sir Peter Spencer: I think from the perspective of broader discussion between the Ministry of Defence what we do in procurement, I detect there is not a and the Treasury, which may have been touched on downside in it other than the fact that when the this morning, as to the way in which we address results are published in terms of our cost overrun, overall within Defence our understanding of the for example, it will include the additional cost of resources which have been made available and the capital. For example, last year when the date of flexibilities which are available in terms of using Typhoon’s beneficial use to the Royal Air Force was those resources. It is really for other people to redefined and, therefore, it stayed on my books for explain where that discussion has got to. Some a considerably longer period, there was a £1 billion5 speculation was apparent in the press and people hit in terms of how bad it looked which was actually pick up on that, but from my perspective there is the additional time I paid this notional interest, nothing in RAB that has aVected the way in which I which was also a corresponding saving to Strike run the Defence Procurement Agency that has been Command because they would not be paying any a cause of anything other than trying to help interest on it, so it kind of made the headlines more industry because it focuses our minds on getting on garish than usual. I would not be human if I did not with the job. say that there was a slight downside to that because some 40 per cent of the cost overruns declared as the Q136 Mr Havard: One aspect of this is the phasing bottom line in MPR 2003 were those interests on of particular projects which you have made capital charges. It makes it look worse than it reference to. Do you think that might be part of the actually is to the person in the street who is used to engine that drives these perceptions, that things thinking more in cash terms. So far as the way it might be altered in terms of the phasing and the way operates inside the Ministry of Defence, we have got in which they are done and that causes the the systems in place and we now use those systems to perception? make the sort of strategic judgments about what we Sir Peter Spencer: I am sympathetic to the concerns need to do that you might expect. I mentioned earlier of industry when they hope that we will proceed with the business of the rate of delivery of assets in the a given programme by a given date and, despite best course of construction. You could not preside over endeavours all round, we do not get to that point. I an organisation where year-on-year the value of have also been very sympathetic to the proposition that there are occasions when, even allowing for 5 Note by Witness: The additional costs reported by Typhoon in MPR2003 consisted of £649m in capital charges, £291 allowance to be made for the complexity of our millon in payments to industry and £97m for additional programmes, the decision making in the competition capability. does too often take longer than we believed that it Defence Procurement: Evidence Ev 31
12 May 2004 Sir Peter Spencer would and we need to find a way of being much more and security of supply during future operations and eYcient at bringing those processes to an end so that over time is clearly a key concern of the Ministry people do not have to live with the uncertainty, of Defence. because it is the uncertainty which is a major concern. All of that feeds speculation as to what the V causes of delay might be. Q139 Rachel Squire: On that basis you are in e ect saying that consolidation, restructuring, the UK defence industry is basically going to be an Q137 Rachel Squire: Sir Peter, can I come back to international club but one based in the UK? some of the responses you were giving earlier to Mr Sir Peter Spencer: The restructuring will be Cran about the kind of defence industrial inevitably—and I know it is a slightly irritating capabilities that it is important for the UK to retain answer but it is the only answer I can give—a matter for strategic reasons. I want to come on to ask you for the shareholders of the companies concerned, about our links with the United States because it is and there are limits as to the ability of the Ministry seen by many in the UK defence industry as the main of Defence to alter any of that. We can make it clear threat to the technological base in the UK because outside the regulatory process what it is that we hope of the ability of the USA to invest huge amounts of to get, what we will continue to be able to do after money in research and technology. We are all aware any such restructuring has taken place, and, because that a number of American companies are currently in the main the prospective owners of these looking at takeovers of UK defence companies. So companies wish to continue to do business with us, can I ask you how concerned you are with frankly whilst we cannot compel we certainly can be the scenario put to us last week that “the UK is persuasive. So if hypothetically you get a change of simply going to become the American metal ownership which gives a strong underpinning of a basher”. company to ride out the peaks and troughs of our Sir Peter Spencer: I do not think that is likely to own demand on industry because they are able to happen. provide work from elsewhere, that can actually be very helpful as a component of nurturing the Q138 Rachel Squire: Would you like to comment industrial base over time. So I can see there being any more on the relationship between the UK and risks in some areas but I can also see there being US defence industries? benefits, and I do not think it is possible to give a Sir Peter Spencer: I would say there are a lot of completely general answer. companies in this country who sell a lot of high-tech equipment into the United States, particularly the second-tier niche suppliers. It is a much tougher Q140 Rachel Squire: In relation to the continuing question, as you know, selling the primary platforms consolidation and restructuring, and the into the United States, so one has to draw a clear involvement in that not just of UK based firms, have distinction between which part of the industry we are you in the DPA given any consideration as to how talking about. There are numerous examples of that might aVect the Defence Industrial Policy and technology which has been pioneered in this country your acquisition policies and processes? Do you which the United States themselves have not been envisage that there will need to be any changes to able to invent and which they have been very happy reflect and deal with the restructuring and to purchase from us. They benefit a lot from us and consolidation that you are talking about in general we certainly benefit from the opportunities, such as terms? with Trident, such as with Tomahawk, where we Sir Peter Spencer: If the result of restructuring and obtain from them oV their much bigger production change of ownership leaves the definition of a line a product which we could not have aVorded to company to continue to be treated as if it was part of develop ourselves or to buy in such small numbers. the home industrial base, as it is currently with So there is inevitably a case by case judgment on this. Thales-owned companies, there is no need for In terms of ownership of companies, I am not really change because the principles endure. It is possible I in a position to comment on the most recent suppose to conceive of diVerent types of proposition because it is subject to the regulatory restructuring which might cause us to have concerns, process and it is just improper for me to get engaged, particularly if it related to protection of very but the Ministry of Defence is able to make sensitive technology, and certainly the work which representations on two principles, one is security we will be doing as I described earlier to establish our and the OYce of Fair Trading will be looking at strategic priorities, that will in turn influence in the competitive issues. If I look at other examples where fullness of time the sort of advice which will be given Thales, for example, has bought UK companies, to ministers concerning particular restructuring they have continued to create wealth and create proposals which might come forward. technology inside the UK, it has sustained jobs, it has sustained the source of supply and we treat them in terms of Defence Industrial Policy as if it was a Q141 Rachel Squire: So you do not particularly see UK company; was part of the definition of UK it as a major issue which you need to address in the industry. By the same token, quite a large chunk of Defence Procurement Agency? British Aerospace is owned in America. The whole Sir Peter Spencer: It is an issue which we need to process is becoming increasingly global. We need to monitor very carefully but it is an issue on which the be very clear about the principles which apply here scope for intervention is extremely limited, and it is Ev 32 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer an issue where we need to be very objective about of meeting our requirements to certify the software assessing both the risks but also the opportunities of that aircraft for safety purposes in ways other which a restructuring might provide. than having access to the code within the UK. We can deliver it in a slightly diVerent way. We need to look at what consequence we need to have and think Q142 Mr Cran: Just a few questions on access to carefully and diplomatically with our United States’ technology in relation to the Joint Strike Fighter. Sir colleagues as to the best ways and manageable ways Richard Evans, when he came along to see us on 5 May, a meeting I referred to before—never a man of doing it. I do not blame the company for feeling who is backward in coming forward—was very apprehensive over this, it is quite right to signal to explicit. He said, “I think JSF is a classic example. It me and my people that we have a part to play in is no good when you have signed up and paid your ensuring that we get continued access because the cheque over and trying to go back to negotiate the challenge in the United States, as you well release of technology.” Not really well put but his understand, is the sheer scale and complexity of their point is very, very clear. Therefore the question I organisation and making sure that there is a want to put to you is, why in heaven’s name did we commonality of message at various levels within the sign up before we concluded any deal on the release State Department in particular. of technology? Maybe this was before your time, I do not know, but I am sure you have looked at it. Sir Peter Spencer: It was considerably before my Q143 Mr Cran: Can I just ask the question in a time as the Chief Executive of the DPA. What I slightly diVerent way. When and if we have a major would say here is that this Committee has been purchase from the United States in the future, how extremely supportive of ministers and of the far up the MoD’s list of priorities is the access to Ministry of Defence in discussing in the United technology? Is it high up there? I do entirely concede States the general concerns about access to that you cannot just bash the table and say, “No technology, and the results of that were the order unless we get access to technology” because prospective Buy American legislation which was circumstances may not allow for that. Is it high up passed last year was a good deal less problematic the list of priorities? than it might have been, and I am grateful to all of Sir Peter Spencer: It is high up the list. We are a level those who helped to persuade people the other side one supplier. We actually contributed $100 million of the Atlantic to reconsider. It is also the case this at the very early stages of the technology is an extremely sensitive area for the United States— demonstration, so we already have unrivalled access you do not need me to tell you that—so confronting to technology compared with other nations, the the United States in public over these issues and in question is how much do we need. It is fundamental the run-up to an election does not seem to me to be in the considerations of dealing with projects V necessarily the most e ective way of dealing with through life. I work extremely closely with Sir this. We have had the personal involvement of the Malcolm Pledger, the Chief of Defence Logistics Prime Minister with the President about unlocking and one of his major concerns, quite rightly, and the sort of flow of information which is needed in mine, is to make sure that we do not just look at the procurement as well as in other areas of defence. We procurement being up to the point of taking delivery have set up the bilateral Defense Acquisition and handing it over, we have to understand how cost Committee, which is chaired by Sir Kevin Tebbit eVectively and operationally eVectively we are going with Paul Wolfowitz, and first met in February. We to make use of that equipment through life. have identified the specific areas which need to be Technology is a key component of that in terms of followed through, including the Joint Strike Fighter, and a great deal of progress gets made quietly by upgrades, in terms of dealing, as we invariably have dealing with these things fairly discretely and not to, in a live operation when you push the having them as headlines, which this year of all years performance envelope to somewhere you have never would be counter-productive. So far as access to been before and you find something which needs to technology which is needed by British Aerospace to be done quickly, and that is a point which is well discharge its responsibilities as subcontractor to understood by Mike Wynne, who is my opposite Lockheed Martin on Joint Strike Fighter, we have number. We need to know that we can operate this been getting there. We have been arguing it through. thing eVectively in operations, not join a queue and We have been doing our utmost to help industry get the thing fixed six months later. over this to create the right of sort of openings with the DoD and the State Department. There are still some areas which are going to be more diYcult than Q144 Mr Cran: Are you concerned about reports— others. I believe that by working together in close and I have to admit they are only reports and I guess harmony as UK Limited on this we will continue to you could very easily say “I never comment on get access to the information which we need, but it is reports”, but let me try this—the reports being that not going to be easy and we are going to have to be the US is developing anti-tamper technology on the very careful about the way in which we conduct the Joint Strike Fighter to protect Stealth and it is not dialogue. I am not sure that it would have been going to share that technology with anybody. Does possible to have demanded this as a condition of that concern you if it is true? entry from the outset. If I look at the Attack Sir Peter Spencer: I would not comment on that helicopter as another example, we have found a way specific example. Defence Procurement: Evidence Ev 33
12 May 2004 Sir Peter Spencer
Q145 Mr Cran: I would just like to know why. protect ourselves against the possibilities of being Sir Peter Spencer: Because we are a tier one supplier held to ransom, as it were, by other people, including of the United States. in simple cases making sure you stockpile enough of the stuV if it is that important to you or making sure Q146 Mr Cran: Why does that preclude you from that you have access perhaps to certain design giving me an answer to a fairly simple question? information so you could become self-suYcient, Sir Peter Spencer: Because it is not a simple albeit less cost-eVectively, in extremis. Security of question. supply is a factor which needs to be dealt into the decisions and there is not a single way of Q147 Mr Cran: I do not care how complicated it is, answering it. we have got all night if you want. Sir Peter Spencer: If you would like to clear the Q151 Chairman: I can understand that but resource room I will tell you. accounting and budgeting and financial constraints forbid the government from holding too many Q148 Mr Cran: That is a separate issue. If you are supplies and then you are reliant upon the “just in saying you do not want to share it with the public time” concept that may or may not deliver. There is that is another matter. this appalling dilemma that the more kit you hold in Sir Peter Spencer: I am very happy to send you a the event of somebody letting you down the more the note.6 financial penalties there are involving suppliers. Sir Peter Spencer: But we do have a long-standing Q149 Mr Cran: If it is confidential we understand. agreement with the United States generally in terms Sir Peter Spencer: I am sorry; I should have made of security of supply which to date they have it clear. always met. Chairman: It is not so much the US. Right, we are into the last half or so and we hope to finish by 5.30. Q150 Chairman: One of our concerns thus far with Frank please? Stealth and Joint Strike Fighter, which is essential because we do not have resources to make too many systems now, is if the US does not give us full access. Q152 Mr Roy: Sir Peter, last week we were told that V We know about the ITAR waiver, which is the procurement process is still su ering from “a unclassified information, but when it comes to a conspiracy of optimism” and that all involved (the crisis, and we require in a war lots of things to be MoD and industry) are over-optimistic about the done, if we do not have access to all the information cost of military capability and the degree of risk that necessary it is a question of joining a queue but we is involved in major defence projects. Do you agree need something, we will not be able to get out the with that view? nylon stockings and hammer and bang on the kit Sir Peter Spencer: I would find it hard not to because any more and tie something around it, it would it was my words being quoted! require access to sophisticated arrangements. I should imagine in any war where we decided to go Q153 Mr Roy: You recently stated at a Committee on our own, if there will be such an occasion, we will of Public Accounts meeting that the MoD now need American support. The more you rely on recognises that there is a limit to which you can others, the more veto power they have over you. We transfer financial risk. How is this recognition being know from our experience, Sir Peter—Belgium in reflected in your current acquisition policies and 1991, Switzerland in 2003—we know the problem. procedures? Do you have any concerns about it? Is it inevitable Sir Peter Spencer: It is reflected in the work to think the more you procure from abroad the more in hock through. One of the key principles of smart you are to other people’s goodwill and willingness to acquisition, which as I said has not been fully taken supply you with what you require in an emergency? up, is in contracting more intelligently with industry Sir Peter Spencer: I think the general point is well and having a closer relationship and together made and on the specific point about the Joint Strike derisking the solutions to procurement and instead Fighter, and I touched on that slightly earlier, I of thinking in terms particularly of however hard might say Mike Wynne my American counterpart is you have tried to derisk in advance there is some very clear on what our concerns are and what we will residual uncertainty at the upper end of the need to be able to satisfy ourselves on in terms of capability, that was generally the case, that you security of supply and the ability to mount recognise the fact that you cannot just transfer the operations successfully. Lord Bach is extremely risk and sort of say I will come back in five years engaged with these issues in all of the procurement when people have done this, but you recognise that projects which we have—security of supply—for the you are talking about risk sharing and risk reasons that you just gave. That said, I would have assignment and you structure the contractual to point out that virtually all of the equipment which arrangements to reflect that. That leads you into we produce in the home industry at the whole system arrangements which are diVerent from highly level is dependent on overseas supply of key incentivised fixed and firm prices with cumulative components, so we are operating in a global village retentions and 20 per cent in liquidated damages here and there are a number of ways in which we which at the upper end of the scale of complexity have hardly ever worked and often had quite a 6 Not printed corrosive influence on outcomes because of the Ev 34 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer behaviour that it brings about so under those of cost increases and time slippages during the circumstances we are paying much more attention to demonstration and manufacturing phases. What equality of information on both sides with a real changes are you planning? understanding not only of the technological risks Sir Peter Spencer: To the assessment phase? but also some of the other things that come to bite you if you have not really thought through how you Q156 Mr Roy: Yes? are going to work together on the supply side. We Sir Peter Spencer: I think in the main the assessment look at the ability of diVerent parts of the supply phase will have more resources devoted to it and chain to deliver further down and their ability to compared to the way it has been done previously it accept the risks and all of that, so we get a much will take longer and we will not through thick and more holistic understanding of what the proposition thin hold on to a pre-declared date for making a is and draw up the contract accordingly. One of the main gate decision come what may and regard it as work streams which is working very hard at the a sign of failure if we do not make it. moment, led by one of my most experienced directors of contracts Mr Waddingham, is new Q157 Mr Roy: Why is it a sign of failure if you do arrangements for contracting with industry and this not make it? is very much at the heart of the work which he is Sir Peter Spencer: Good question. It is a question I doing, in consultation with industry. There are lots asked. of examples where we have already taken this approach notably in support and it has worked well. Q158 Mr Roy: That is why I am asking it We need to codify that and spread it across the Sir Peter Spencer: Because people have defined it as Ministry of Defence, particularly across the DPA so an anchor milestone saying if we do not make the we get greater consistency in applying them so that decision on this date we will not make the in-service industry feels more comfortable that it has got into date. It is a fallacy and a bad decision made on the arrangements which are more appropriate for what grounds— it is doing. Q159 Mr Roy: Who is disagreeing with that? Q154 Mr Roy: Obviously industry must be Sir Peter Spencer: It is the way the programme has comfortable because that last quote I gave you was been run in the past. from the Vice-Chairman of Thales last week but I am glad the two of you think extremely similarly. On Q160 Chairman: A question on streamlining the that “conspiracy of optimism” quote from you both equipment approvals process and the cost of did your stocktake of smart acquisition seek to bidding. I read an article recently in which you stated address the problems that are perceived from the that the approvals process needed streamlining and conspiracy? this was echoed in last week’s session with industry. Sir Peter Spencer: Yes it does because what it says How would you like to see the current approvals is if you try and spend too little time and intellectual process changed, and how would this help ensure eVort and too little money in the assessment phase that the projects are delivered more to cost, more to you will not have understood the capital investment time and more to the specifications demanded? decisions that you are about to make and you will Sir Peter Spencer: There are two separate questions simply have closed your eyes to the real risks which there which are inter-related. In terms of the are there which will then come and take you by approvals process the length of time taken by the surprise. And so often when you look at the reasons Ministry of Defence to make a decision on an initial given for cost overruns it is because we did not gate proposal or a main gate proposal has been too understand the technological risks. So that means long in the first instance because people have been that we have had to engage in discussions with concerned about whether or not there is enough General Fulton and his people to say that there are evidence to support the basis of the proposal and occasions now where we are going to need to have a therefore there has been an enormous amount of much clearer plan for derisking the technology of the circulating of papers in draft and diVerent parts of potential solutions and mature the proposition for the organisation with good intentions bringing an longer and we will actually get to the end point independent scrutiny to bear on various aspects like sooner as a result of that because simply starting risk and commercial arrangement and all the rest of early if you are running in the wrong direction does it. The net result has been inconsistency as it has not get you to the end point on time. I mentioned the gone through that process and it is because we have V 2087 sonar project earlier and it created its own e ectively been regarding approvals at the main gate success because it spent an amount of time as an event as opposed to a process. When you understanding the technology, the risks and the accept something into service and prove that it has environment before we set the performance, time actually got all the performance that you think it and cost parameters. should have, that is a process which takes some time. You do not do it all on one day so what we have put in place are arrangements which seek to get much Q155 Mr Roy: One other area where I am sure you greater consistency in the demonstration, and the Vice Chairman of Thales will agree is the independently verified by appointed centres of changes that have been planned to make the excellence of various aspects of the approval, so that assessment phase of projects to help reduce the risks when the document comes to investment approvals Defence Procurement: Evidence Ev 35
12 May 2004 Sir Peter Spencer report it is not a huge thing with lots of annexes and Q163 Chairman: Do they say, “We cannot aVord to complications but it is quite a thin paper that says, wait too long. The process has cost us £1 million or “The top statement in this area is as follows ... It has whatever to put in a bid. We are not going to spend been independently verified by so-and-so. If you and the time to do it”? Has anybody complained to you your staV wish to verify it for yourself here it is.” It about the timescale? concentrates the board’s mind on the key issues of Sir Peter Spencer: Certainly people have made the the decisions that need to be made. The reason why point to me, especially in the context of PFI we have had problems in getting through the initial programmes, as to the length of time it takes, and I gate is because there has been a subtle but quite have done some analysis of about a dozen DPA-PFI important departure from the original assumptions projects and the length of time it has taken from behind the proposals for initial gate which was a issuing the PQQ, which is before the invitation to relatively low level hurdle where you would test out negotiate, from which point industry would start to lots of propositions and you would say we have got take a serious interest to placing a contract, and the a capability gap here, here are the options for average turned out to be three years. That is too meeting it, and here are some of the procurement long. I do not think we will ever match the time that options and have a plan for converging that down or is taken in some other parts of government where stopping it and saying if this proposition is not there are standardised contracts and they are largely maturing let’s stop it. In reality virtually none of repeats of something which was completed those proposals was ever stopped. So the people who elsewhere. We are talking with industry on this in were properly concerned about controlling the terms of what we need to do and to set a target overall amount of programme that we were going to internally of the sort of time line which we would aim take on began to insist that there was a much greater to achieve and it would be considerably shorter than degree of proof at the initial gate than had been three years. envisaged, but of course the project had only just started then so we then ended up with quite a lot of Q164 Chairman: If you require something and you what I would call “solutioneering” and narrowing know a company can deliver, do you have an the choices in quite detailed numbers and arguments opportunity of short circuiting the whole process by before you had even gone into the assessment phase, saying, “To save on two or three years in a all of which held the process up. In those two areas, competitive bidding situation, you can deliver the the Investment Approvals Board and the Ministerial goods so we will arrange a contract with you and Steering Group, to which I have referred earlier work out the cost?” Is that an option or do you have which Lord Bach chairs, are very supportive in to go to competition always? bringing forward ideas which are going to streamline Sir Peter Spencer: Competition is the starting point those arrangements so there is much more for all high-value projects so long as you believe you confidence when we put the proposition forward can get genuine competition. There have been that it is going to go through in an acceptable examples—and I cannot illustrate it immediately timescale. with one that springs to mind—where you could take a look and believe the competition would not necessarily deliver value for money because in reality Q161 Chairman: Is there any problem with the cost the ability of one party to deliver cost-eVectively of bidding? I know the Vice Chairman of Thales what you need is so much greater than the other. raised that question with us last week. Under those circumstances competition can be fairly Sir Peter Spencer: Certainly I accept the proposition misleading because you would probably get a better that time is money and if we set out in good faith price and better arrangements in engaging in a non- together believing that a bidding process is going to competitive pricing arrangement although I have to take two years and it takes three and a project team say that one of the major benefits of competition if is in industry for three years rather than two that has you can run it eVectively is not necessarily in the a cost that they had not anticipated. Our Defence number you think you are going to pay on day one, Industrial Policy and the way we are aiming to it is actually achieving the numbers you finally pay implement it says we will not run these things when the contract is delivered. That in turn is a beyond the point at which they are going to deliver function of the terms and conditions of the contract benefits. So we certainly recognise the need to make which you negotiate and once somebody knows they earlier down selection decisions. It is a proposition are going to get the contract anyway it does, that is unanimously supported with industry but understandably but frustratingly, lead to a certain with one caveat; they would prefer to be selected as inflexibility in being willing to negotiate those terms the winner! and conditions.
Q162 Chairman: Apologies to you, Sir Peter, I was Q165 Rachel Squire: Can I ask you about the Future trying to catch the next question so we can escape for Aircraft Carrier and certainly impress that I take an a vote and come back. Please carry on. interest not just as a member of this Committee but Sir Peter Spencer: My point was we accept that it is also as the MP for Rosyth Dockyard which is very in everybody’s interest to make quick and eYcient keen indeed to get a major share of the work. We decisions but industry usually has the unspoken concluded in our last report on defence procurement caveat that a quick decision is great as long as they in this Committee that “the alliance approach for the win it. Future Carrier Programme deserves support as a Ev 36 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer model for trying to avoid some of the pitfalls of the Q167 Rachel Squire: Yes, by the Minister. Nimrod and Astute programme.” However, last Sir Peter Spencer: It is an indicator of the extent to week we were told by industry of a concern that the which Lord Bach and the Secretary of State have alliance was developing into a sort of procurement been receptive to the proposal that we need to committee. Can you say, Sir Peter, what plans you change the way in which we do procurement, along have for changing the arrangements for the alliance the lines I outlined in the stocktake, and that they and the arrangements for the management of the recognise that it is more important to get this right programme, and how they would impact on the in- than to tick the date oV in public. That is quite a big service date for the carriers? decision really and I am extremely grateful for their Sir Peter Spencer: I hesitate only because we are support. We have put a proposal to ministers and it engaged in quite sensitive negotiations with our is being discussed at the moment with the Chief potential suppliers here and I do not normally Secretary, so it is a bit diYcult for me to make a negotiate in public, but as a general approach we public statement which appears to pre-empt that have benchmarked against the best practice in the agreement, but we would be seeking at this stage to petro-chemical industry, pioneered by companies continue at least until the end of this calendar year. such as BP and CONOCO. I have looked at the way We will be doing work in the assessment phase which the alliance operates at Terminal Five with the would have been being done during the first stages of British Airports Authority at Heathrow, and there is development or demonstration and manufacture, so a great deal of evidence to demonstrate that the it is not delaying anything, it is actually maturing it detail of the alliance which will deliver the best so we understand it better before we set the time and outcome. We could learn a lot from those cost targets, and this is very much the case of what exemplars—and it is not a committee so it is a would be happening in the civil procurement sector slightly unfortunate term to have used. This has been for complex projects so they would not be declaring independently assessed by people who have no axe the sanction prices and dates until they had to grind on this, who are not involved in defence, understood the problem better. who are experts on procurement. It has been independently reviewed by the OYce of Q168 Rachel Squire: I was going to ask you to Government Commerce and I have discussed it at comment on Sir Richard Evans who told us last some length with Sir Peter Gershon so I am actually week there was “realistically at least another year’s taking quite wide-ranging soundings here because worth of work to be done before we begin to see the one thing which we all share is that we do not whether the scale of risks here can be managed and want to allow the aircraft carrier programme to how they can be managed” Given what you have just degenerate into the problems that have beset Astute said about towards the end of this calendar year but and Nimrod. I believe that there is a great prospect also emphasising that should not be seen as a major here for going forward together and getting this delay, are you saying that Sir Richard in evidence in alliance to deliver and there is no consequence on the his statement was fairly accurate in talking about In Service Date of the carriers which depend upon another year? those alliance arrangements. In fact, the work on the Sir Peter Spencer: What I have said is consistent and design of the carrier continues to mature and the what I also said is I was not in a position to give you design maturity of the warship is considerably more a precise date because it was being discussed at advanced at this stage already than any other ministerial level with another government previous warship where we have gone to place the department. So it is rather hard for me to make a contract, but we are still in the derisking phase and public statement. I think the key point here is that we all parties agree that it will be mutually beneficial for are in agreement with all of the key players here that us to recognise that having spent about five per cent there is benefit in continuing to mature by an of the budget to date on the assessment phase that extension of the assessment phase because we are there are strong arguments to continue to mature still designing work which we will be doing in an our understanding of the design of the system extended assessment phase which would otherwise integration aspects and of the supply chain aspects have been done in the demonstration phase but we which are crucially dependent on how we use all of would to a certain extent be guessing how much it the shipyards in the UK that are potentially going to was going to cost and precisely when it was going to be involved in this in order to have a much better come in. At the moment our plan is to come in on the understanding of the performance time and cost declared in service dates but those will normally be parameters which would be set at the main gate of set at the main gate decision and when we have capital investment decision-making. continued to derisk this proposal.
Q169 Rachel Squire: Just two other questions. Picking up on some of the points you have made about how this whole model has been developed, are Q166 Rachel Squire: Would you like to give any you satisfied that the MoD has got or is gaining the comment on when you think that main gate will be appropriate skills for the role that it is playing in this reached? new form of alliance? Sir Peter Spencer: It was planned and publicly stated Sir Peter Spencer: Yes, otherwise I would not be to be the spring of this year. doing it. Defence Procurement: Evidence Ev 37
12 May 2004 Sir Peter Spencer
Q170 Rachel Squire: And also picking up on your reasons I think you just have to recognise that a point about cost, the memorandum submitted to great deal of what is speculation in the media at the this Committee on the Future Aircraft Carrier gives moment is trying to anticipate the outcome of a very a current cost estimate for the two carriers of around important negotiation which is being conducted as a £3 billion, but press articles have reported that the matter of some urgency by the appropriate levels in industry considers the cost to be nearer £4 billion. the organisation, with the aim of getting this sorted Would you like to comment on that and particularly out. what is your view on accepting smaller carriers if the cost turns out to be nearer £4 billion than £3 billion? Q172 Chairman: If the MoD or DPA is sitting on top Sir Peter Spencer: At the heart of this lies a of this new structure will the MoD accept its share of discussion on how are we going to go to contract. the risks if they are playing an important role and You have to ask yourself the question what are the not just stand back and let the two partners in the motives in somebody talking up the price, but we alliance deliver the goods? have very good metrics, independently verified, of Sir Peter Spencer: Well, let me take you back to what we know this carrier can be built for and so in Nimrod. The MoD stood back but it still carried the terms of the quality of information in a more risk. The diVerence here is that it deluded itself into enlightened form of contracting we would expect thinking it did not carry the risk. It thought it had this thing to be settled in the fullness of time but it transferred it all one way. Because we have drawn will be done through a private conversation and not the conclusion, together with industry, that there is through the press. The discussion is actually very always going to be risk for all of us here, and we harmonious. never could transfer the operational risk or the time Rachel Squire: I am delighted to hear it. risk, then at least it has got ourselves sensitised to the fact we have to be engaged positively to play a part Q171 Chairman: I hope you are right because if a and that by talking to your suppliers during the company says the cost is £4 million, British course of a project you are doing the right thing and Aerospace has been through the process before of you are not going to get infected by some terrible bidding low and then having to come to an disease and therefore you have to stay away from agreement afterwards. Is this crying wolf do you them. The concern previously was we had wrapped think or maybe, as you have said, the procurement up the incentivised contracts so tightly that if you process in the last couple of years has not gone forgot to say without commitment good morning swimmingly well so is it possible that your profit that would go down as a default because it was a bad calculations or their budget calculations have gone morning because it rained that day. It is a question of wrong? understanding realistically where the risks are, doing Sir Peter Spencer: If you look at the record of the our best to manage them down before we commit complex projects of the petro-chemical industry they ourselves, having a real understanding of how the were in exactly the same position ten years ago and risks are going to be shared and, more importantly they discovered that if you had a contract in place and more positively, how the reward will be shared which rewarded people for delivering below the for success because the aim is to make this project a target price then you changed the whole dynamic of success, and although there are some exceptions the the relationship between the client and the supplier record of companies like CONOCO and BP at because you work together to mutual benefit with achieving success for the benefit of all concerned is the prize of earned profit at much higher levels than quite striking, and as we obey the same laws of you would normally have made for a given time, so economics, we are the same biological species and we you make a virtue over beating the price. If you, on obey the same laws of physics and engineering there the other hand, and again look at the construction is no reason why we should not be able to emulate industry and the petro-chemical industry, they that practice. found that if you went for a fixed price percentage then the danger was that if the price went up—and Q173 Chairman: The MoD has not shown itself to be it could be laid at your door as the client and the a scintillating entrepreneur and if they are sitting in motive was very much on the supplier to try and a role that is on top of two commercial enterprises, prove that—then not only did you pay the extra then you are relying on their quality of decision- money but you paid the percentage reward on top of making (of which precedent does not give one total that because you were paying a percentage fee. We encouragement) that this strategy is going to work. are finding a way of breaking out of that cycle and Sir Peter Spencer: I do not recognise your there is a huge measure of agreement that we must description of the MoD sitting on top. What you and we can find a more constructive way of create is a team. If you would like me to arrange a delivering the outcome which we need, and if we briefing for you on how these alliancing were trying to insist on a fixed price contract I would arrangements have worked, to be done by somebody absolutely share your concern, which is why we are outside the Ministry of Defence, you might find that not trying to do that. As we are talking about extremely helpful. sharing of risks it is not in my interests to delude ourselves into how much it is going to cost. We will Q174 Chairman: Yes, that would be quite helpful. work from the basis of demonstrable evidence as to Sir Peter Spencer: That is the way I have explained productivity norms in terms of design and build and it within the Ministry of Defence. I have to say I do integration and setting to work. So for all of those not entirely accept that there is an absence of Ev 38 Defence Procurement: Evidence
12 May 2004 Sir Peter Spencer entrepreneurial spirit inside the MoD. The roll-on which will be a combination of reflecting that roll-oV ferry PFI contract I think shows remarkable capability and some work on obsolescence which entrepreneurial thinking from the Ministry of needs to be done particularly on the five main Defence, and there are a number of other examples. computers in the aircraft. We also said that we My aim is to try and roll that out more consistently would need to reassure ourselves that satisfactory across defence. progress had been made on tranche one performance as a fighting aircraft in terms of Q175 Mr Havard: What I am supposed to meeting what has been defined as the interim understand from you is this general process that you operational clearance. So we can see that the aircraft are describing in relation to this contract is now is maturing into the capability which is needed. This eVectively going to become a process that will apply is a necessary part of de-risking the proposal for the full stop as a general way of understanding and build of tranche two, otherwise we will be faced with dealing with large projects from your side? large financial contingencies to cover risks which we Sir Peter Spencer: Not in all cases. There is a whole do not fully understand. So it is a negotiation to get spectrum of partnering possibilities. a proper understanding of what it is we are going to get for our money and a proper understanding of the V Q176 Mr Havard: Okay, so your approach to the air de-risking of the technology as we finish o the tanker might be slightly diVerent than what we have development contract. seen in the carrier and in relation to X it might be slightly diVerent again but you will have a bag of Q179 Mike Gapes: Last week we were told that the tools. Government is seeking to introduce a new variant of Sir Peter Spencer: A bag of tools and you the aircraft and to introduce that variant in tranche intelligently select the tool for the job by examining two, and that is a ground attack variant. Clearly if the particular nature of the given project. the MoD are seeking to add to tranche two, that is Chairman: One last group of questions, Mike going to lead to further costs of some kind and Gapes? further delay, and we had the Chief of the Air StaV in March, on 24 March, telling us in his words that Q177 Mike Gapes: I would like to take you back to the key “is to ensure that our platforms are the remarks you made to my colleague Mr Havard adaptable so we can change the nature and/or scale some time ago about what you described as a of the capability we deliver from them.” He talked “redefined” date for Typhoon and the fact this was a about computing systems, software centres, £1billion hit. I refer you to the National Audit OYce weapons and connectivity, “all of that is what we are Major Projects Report 2003, which reported that at building into Typhoon.” Is not part of the problem the end of March 2003 the Eurofighter/Typhoon had here that the actual definition of what is needed is experienced a cost increase of £2.3 billion over the being changed as the project is going on, adding to original approval and 54 months slippage against the costs? the original in-service date, and just over £1 billion Sir Peter Spencer: There are a number of quite in-year cost increase. Can I ask you in the light of important points in that which I need to disentangle. that report and the fact that it is said that the second The need for the aircraft to be adapted for multi-role tranche was expected to be ordered around the end capability comes as a direct result of us of 2003 (and we are now nearly at the middle of 2004 incrementally moving towards the performance but there is still no sign of an order being placed), which is now needed in defence. When the aircraft why is there a delay and when is the order now was conceived and the numbers were conceived, we expected? believed we then had a much higher need for air Sir Peter Spencer: The delay is because we have not defence and an air defence specialist platform. This yet, or have only just recently, had a proposition platform is inherently adaptable. All of the from industry addressing the price which we are operational analyses and our recent operational being invited to pay. So until that proposition was experience demonstrates that what we need more of forthcoming, I was not in a position to even think now is air-to-ground, and certainly in terms of the about letting the contract. Coalition needs there is no shortage in air defence assets but there is a shortage in the multi-role Q178 Mike Gapes: So the delay is entirely the fault capability which will be needed. The pricing of of industry? tranche two production is entirely separate from the Sir Peter Spencer: No, I did not say that. I said until enhancement programmes to make it multi-role recently we had not had the price. The price is only because there will be very little physical change to as good as the accompanying information and there the aircraft to actually make it multi-role because has been a great deal of detailed discussion with that sort of adaptability has been built into the basic industry as to what the necessary conditions would design. Those enhancements are very largely the be before we go forward to place a contract for the software enhancements to the mission system of the next tranche, because we have still not finished the aircraft, which will be loaded into the aircraft’s main development contract. So we have to define computing systems. So we are not going to be what the build standard is going to be of the tranche physically changing the aircraft design in order to be two aircraft, and that in turn depends upon how we able to make it air-to-ground, we will be adapting its define the end stage of the main development software through life, and that will be part of a contract and how we then define the build standard, separate discussion in two phases at the moment for Defence Procurement: Evidence Ev 39
12 May 2004 Sir Peter Spencer enhancing that operational capability. So that is not Q183 Mike Gapes: My question was, have you a reason for there to have been a diYculty in looked at the option of restricting the number of pricing this. aircraft and restricting it to the air-to-air role and buying something else oV-the-shelf to do air-to- Q180 Mike Gapes: Can I put it to you that we had ground? a Cold War aircraft and now we are dealing with a Sir Peter Spencer: As a hypothetical exercise, I diVerent environment. Would it not be an option, would always be required to demonstrate the range and have you considered the option, of restricting of options to meet any future capability. the Eurofighter to an air-to-air role and buying an oV-the-shelf air-to-ground aircraft separately? In Q184 Mike Gapes: So that is a yes, is it? that context, do we need 232, could we not just stick Sir Peter Spencer: We have not got that far yet, with the 55, or 55 plus 89, and then buy something because we are not due to make the submission to else to do the other role? the Investment Approvals Board until we have Sir Peter Spencer: You would have to ask General priced this contract. Fulton the answer to that question.
Q181 Mike Gapes: He gave his answer, I am Q185 Mike Gapes: So you are not ruling it out as a asking you. possibility? Sir Peter Spencer: He is the person who makes those Sir Peter Spencer: I am not ruling anything in or out judgments. Why would I give you a diVerent answer because it is not something I do. I will cost the as the supplier to the military customer? options I am invited to cost. The position of the Ministry of Defence at the moment is quite clear, Q182 Mike Gapes: Because of the cost. He is not which is we accept that we have signed a MOU for interested in the cost, he is just interested in getting 232 aircraft, we have signed an overarching contract the kit to perform the role. for 232 aircraft, we have the means of adapting those Sir Peter Spencer: General Fulton is interested in the to deliver the capabilities which we need, and that is cost. General Fulton as the Deputy Chief of Defence where we are. As we go through time, as with the StaV (Equipment Capability) has to live within a aircraft carrier proposal which goes forward, we will budget, so he is very interested in the cost and, quite also look at hypothetical other ways of doing it, rightly, he challenges me on the costs, and my job is because we always do in an investment appraisal. So to get the best deal I can on his behalf from defence. the literal answer is, yes, but it does not mean to say The question resolves itself into, “Is this aircraft there is any serious thought being given in that genuinely adaptable?” Yes, it is. It has been built at direction. At the moment we are content to live with the outset with the stretch potential to be able to do the requirement we have declared and with the air defence and also air-to-ground. The judgment we obligations we have signed up to internationally and have at the moment is that we have more need for contractually. air-to-ground than we had previously anticipated, Mike Gapes: Sir Peter, I suspect we will come back to and the most cost eVective way of doing this is with this one at some stage in the not-too-distant future. these incremental enhancements, and, because the Chairman: I think if that idea of Mike’s was aircraft was designed to be adapted from the outset, implemented we should get out of shares in BAE the cost of those is not a redesign of the basic Systems but it is far-fetched. Thank you very much; aircraft, it is changes to the aircraft software. very forthcoming, Sir Peter, we enjoyed it. Ev 40 Defence Procurement: Evidence
Tuesday 25 May 2004
Members present
Mr Bruce George, in the Chair
Mr James Cran Mr Dai Havard Mike Gapes Mr Kevan Jones Mr Mike Hancock Rachel Squire
Witnesses: Lord Bach, a Member of the House of Lords, Minister for Defence Procurement, Sir Peter Spencer KCB, Chief of Defence Procurement, and Lieutenant General Rob Fulton, Deputy Chief of Defence StaV (Equipment Capability), Ministry of Defence, examined.
Q186 Chairman: Minister, Sir Peter, welcome back; drive this change programme forward, for example, General Fulton. We have a pretty long set of through the ministerial group, which we have questions we would like to ask you, although we established, to give high level impetus to the reforms would like to finish at 12.30. Is there anything you where necessary. A brief word on defence industrial would like to say to kick oV? policy: at last week’s meeting the NDIC supported Lord Bach: I would like to if I may, very briefly. fully our approach to an important development of Thank you very much, Chairman. I am delighted to an existing part of the policy, namely, one I know have the opportunity once again to discuss with the that the Committee has been concerned with, our Committee progress on our equipment programme emerging work on industrial strategy. We are aiming and the related themes of developments in our to identify more explicitly the technical capabilities Defence Industrial Policy and Smart Acquisition. As that we need to meet defence needs now and well into you have already said, I am fortunate to have with the future. We will assess the importance of me today Sir Peter Spencer, Chief of Defence sustaining these capabilities in the UK for national Procurement, and Lieutenant General Rob Fulton, security, for technology, or for wider economic Deputy Chief of Defence StaV (Equipment reasons. This is a complex undertaking that will take Capability), namely the equipment capability some time to do properly. I want to reiterate that customer. I recall that last year both Sir Peter and competition and value for money remains at the General Fulton had only fairly recently arrived in- heart of our acquisition system. The results of all this post when we sat before you, but I know they are will be shared with industry and will inform our now pretty familiar faces to the Committee and need priorities for investment. We are doing this work in no further introduction—particularly as you have parallel with our other defence policy industrial seen them both I think during the course of the last work strands, which remain a high priority. few months, and in Sir Peter’s case only 13 days ago. Amongst other things, I think that this work will I want to emphasise first that much has been address some of the concerns expressed by industry, achieved in the last year on some of our most particularly by John Howe of Thales at your earlier significant projects. I want to mention just two at hearing with industry. Chairman, if there is one completely diVerent ends of the spectrum. We message I want to get across today to this Committee achieved, as you know, Chairman, the in-service it is our commitment, my commitment, to ensuring date for Bowman ahead of schedule in March of this that we keep the assessment phase of projects going year—although there is obviously still a long way to and do not move too quickly to main gate before de- go. At the other end of the spectrum, the sort of risking design and design maturity have actually project that no-one ever hears about, I want to just occurred. You will know that the National Audit mention as an example the Dismounted Close OYce suggested that we should do more of that; and, Combat Trainer, which will actually give our troops of course, you will know it is a principle of Smart the best small arms training simulator of its type in Acquisition itself but I want to tell the Committee it the world. That achieved its 50 per cent in-service is not always as easy to do. There are pressures the date of October 2003 and came in under cost, under other way: namely, pressures to get on with the more the £13 million. There are other examples. I believe exciting part of a project, which is production; Smart Acquisition is undoubtedly delivering many pressures from contractors to sign up and pay up; benefits. Although we are moving in the right and, of course, pressures aVecting dates which are in direction, I do not want to suggest we are performing everybody’s, not least the media’s, mind. The truth as well as we would hope on the delivery of is that only by proper de-risking, taking longer equipment projects. It was the right time over the sometimes, paying more upfront sometimes will we last year for Sir Peter’s stocktake, to conduct an in- actually save those delays and cost increases down depth assessment of what we have achieved under the line. We need to be responsible about this, and Smart Acquisition, and what we need to do to we very much welcome the Committee’s support for improve performance still further. You questioned that line. A lot of people are claiming the phrase Sir Peter in detail on 12 May about how we are “conspiracy of optimism” as the way in which implementing the recommendations from the defence procurement has been viewed in the last few stocktake. I will be supporting Sir Peter, General years. I do not know who invented that phrase, but Fulton and the Chief of Defence Logistics as they I certainly do not want it to be replaced by the phrase Defence Procurement: Evidence Ev 41
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
“a conspiracy of pessimism”. Perhaps what we Q189 Chairman: Indirectly through him to you! should all be striving for—and I think this is very Lord Bach: I think every remark you make is much what Sir Peter’s stocktake has achieved—is a indirectly to us! That one certainly I agree. Let me conspiracy of realism. just say a word about that. The first point is, I really do not think the fact there is tension between industry, on the one side, and the Ministry of Q187 Chairman: Thank you very much. Minister, Defence, on the other, is necessarily a bad thing. We the broad message we have received from industry is are separate animals. Industry have their tasks and that the Defence Industrial Policy has made a good their jobs and the people they have to look to, to start but needs to be further developed. You have perform their tasks, and we have ours. Ours are the alluded to this but perhaps you could give us a little Armed Forces to make sure they are properly more detail of the thinking of the Ministry of equipped and, of course, the taxpayer too. If the Defence and of yourself? In what areas are you relationship was too cosy, then I think even more planning to develop the policy further? questions would be asked than are asked at the Lord Bach: The main one, and the chief one, is this present time. Having said that, it is important and I move towards establishing an industrial strategy to think industry agrees we have gone some way down the line of having a better and closer relationship go alongside an industrial policy. We need to further with industry, because some of the projects we develop and state what technologies and industrial undertake are so complex, so diYcult, so vast and capabilities are of the greatest importance to us in expensive that we need to work with the grain of maintaining existing capabilities, and which ones we industry rather than against it. As far as BAE expect to require in the long term. This will not be an Systems are concerned, they are clearly very easy task, because I have just said it will take quite a important contractors for us; have been for some long time to do properly, but it may also be not time and remain so; and will be, I am confident, in exactly a happy story for everyone; because if we the future. The relationship is often satisfactory, and decide that we need certain capabilities, either now sometimes good or better. At the corporate level or in the future, it may equally mean (it is almost though it is sometimes diYcult because of diVerences bound to, is it not?) that there are capabilities we in approach at the highest level and perceptions of thought we needed or we had taken for granted that how the relationship should work. In particular, the we needed that we no longer do. I believe that this seeming wish of the company at the very top to be in move towards an industrial strategy, asked for by some way in an exclusively privileged position with the industrialists when they appeared before you a the MoD (the word “champions” is sometimes used little while ago, is the main advance that we hope to here) is something which I am afraid I cannot accept make in the next few months (it may take longer than as being realistic. Competition is the basis of our that to do it properly) in the DIP. I would say, and I procurement policy and must, I think, remain so. would stress, as I think the industrialists did too, the Let me tell you, there are a whole range of levels Defence Industrial Policy is still quite new—it is less upon which the relationship between the company than two years old. Some have asked why there was and the MoD has to be a good relationship, and it is not one before, and I think that is quite a good on a whole range of projects. If I take as an example question. I think we should be given some credit, the support projects—there are some very major which is cross-government, for having agreed a support projects for existing equipment. There is no Defence Industrial Policy and working our way doubt that the relationship is excellent. From through it. It clearly has had an eVect, I believe, on personal experience I am responsible as you know, certain procurement decisions taken already. The Chairman, for defence exports; when I go abroad I one I would say it has certainly had an eVect on was invariably meet up with employees of BAE Systems the Hawk decision. who are in the business of trying to sell equipment for their company and for the country. Their working relationship with DESO is incredibly close; Q188 Chairman: When we had the industrialists in and their working relationship with the Department Y with us the Chairman of BAE Systems took the lead is close too. Of course I accept there are di culties role and he told us, “there are some pretty big in this relationship, and I actually accept what you said to Sir Richard—which was that it was tensions in the relationship” with the MoD. He important that all sides do their best to make sure appeared to be in a conciliatory mood and his term that the relationship was a workable one, and one expires shortly. How do you see the relationship that got better rather than worse. I think that is between the Government and defence happening. The personal relationships are very manufacturers, and between Government and what good. I know the CDP sees the Chief Executive of is our largest British defence manufactures: a) are BAE Systems at least once every two months. I have there tensions with industrialists in general; and, b) regular contact with senior members of BAE your take on the olive branch that Sir Richard was Systems. I have to always remember though that our proVering which, I must say, was viewed with some interests as the Ministry of Defence are to make sure scepticism by myself? I would welcome your that our forces are equipped properly, and that the comments. taxpayer’s position is looked after. BAE Systems Lord Bach: I have read the transcript very carefully and all other defence companies have an obligation including, if I may say so, Chairman, your remarks to their shareholders which is of crucial importance to Sir Richard. to them. Ev 42 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
Q190 Chairman: But there is more than tension if where the ownership of companies actually resides BAE Systems told us publicly and privately that from one day to another, from one month to there is a lot of pressure on them (because they another. What matters is where the work is done; cannot make any money in this country) to pack up where the work is produced; where the jobs are; their bags and operate out of the United States or where the technology is; and where the value is in the elsewhere. That does not seem to me to be an broadest sense. There are companies under the example of tension. That seems to be an example of Defence Industrial Policy, which has been widely something infinitely worse than tension. You may accepted as a fair document, that originate from well argue, Minister, that this is just BAE abroad that have invested in the United Kingdom positioning themselves for something or other. The and, as a consequence of that investment, have nature of the relationship must be pretty high when added value by adding jobs, by providing these threats are aired publicly and privately. What technology and helping us produce the equipment can you do to reassure this Committee that the that General Fulton wants us and requires us to largest defence manufacturer—for all of its faults produce. In the same way, British companies have and faults are on both sides—will remain in this also invested abroad as well, and are an important country? part of the process both in Europe and particularly Lord Bach: I cannot guarantee that, can I? From in the United States. As far as this particular where I sit this is part of the division that there is transaction is concerned, I am really not in a between the Ministry of Defence and private position to say any more. industry. It is my belief, of course, that BAE Systems will continue to play an important and leading role in the manufacture and support of British defence Q192 Chairman: Laisser faire has overtaken this equipment. We are living in a diVerent world now as Government. It is not particularly interested and has far as defence equipment is concerned. To say it is a no influence whatsoever in a manufacturing global industry really is just a statement of the company, a very good one, that has received obvious. BAE Systems, and other British enormous orders from the British Government, and companies, have bought and purchased companies was ostensibly in partnership with an excellent all over the world, particularly in the United States, Italian company. Frankly, as far as you are and are absolutely entitled to do that. We also, in concerned, if that company changes ownership then this country, are willing and happy to see companies this is just a matter of reality and bye, bye to that originated in other countries buy into the ownership? Obviously you do not, but I feel that United Kingdom too. That is the way the markets ownership is partly related to manufacturing; are going to continue. I would very much regret it if because if a company is controlled abroad then (as BAE Systems took the course that, as you have said, other governments seem to look after their defence has been publicised to some extent of moving out of manufacturers quite well) if there are any job cuts the United Kingdom. I do not believe that. This is a they are more likely to be in a foreign country than company that employs, to use your figures, 40,000 in their own country. You are doing nothing about people in the United Kingdom. They are an essential it. You are not contacting GKN. You are just part of our defence infrastructure. reading The Times and seeing if Westland disappears and comes under the ownership of an Italian company, albeit a very good Italian company? Q191 Chairman: Tell us something about the future Lord Bach: Can we take one thing at a time. I think and the manufacturing of helicopters, Minister. I the stage of that transaction is, there had been an know I do not rush to believe anything that appears announcement at a board meeting of GKN last in the newspapers, but is this going to be another week; but that is as far as it has gone, Chairman. Of story (on your watch) that another British company course we take a great interest in what might happen heads not west but south? Is the story true that in the future. Of course, the British Government will Finmeccanica are in essence going to acquire GKN want to talk these matters through if this particular Westland? Is this another wonderful example of our proposal goes any further. We will want to talk these Government’s strategy to help internationalise matters through with, as you say, Finmeccanica a defence manufacturers (and I just wonder what there successful international Italian company. We will might be left of British defence manufacturing to sell want to talk over matters which relate to much more to competition abroad in the future) which I would than just security, but also relate to jobs, work that very much regret? is promised for the future and what their intentions Lord Bach: I think it is a very fair question but of are. It is not just a laisser faire system we support; course, as you know, I am like you and can only look but we have to accept that this is a global defence at newspapers and read what I read. These are market. We believe, probably more than any other private companies which are entitled, on the face of country in the world and practise our belief, that it, to engage in what transactions they wish to, there should be openness in the world as far as this subject to regulations and subject, of course, to our is concerned. We will want to also protect the being satisfied over a number of very important interests of British workers, as well as the interests of issues, including security of supply. Can I just British security. remind you, if I may, what the Defence Industrial Chairman: You know, Minister, the market is not Policy says about what qualifies as being British and open. We are open—and more foolish the British what does not. It really is time that we left behind the are. To us it is very diYcult, in many cases, to concept that what actually matters in the end is operate in the opposite direction. You know my Defence Procurement: Evidence Ev 43
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton views. If I talk to you privately they will be expressed amount of specialist skill that we require in this rather more loudly and less elegantly than at the country. My own view, and here I am really present time! following what Sir Richard Evans said before you earlier, is that the relationship between the Q193 Mr Jones: Can I just pick up on the Government and BAE Systems is not nearly as bad relationship with BAE Systems. Certainly the people as it has been made out to be. It may be Sir Peter I have talked to, for example, at the CBS, at an would like to add something to that. operational level seem to be doing quite well. The Sir Peter Spencer: I think the other point I would relationship seems to be working quite well in terms add on is that if you look at the Defence Industrial of work with Thales and the relationship with the Policy and apply it as written down, competition MoD. I do understand the point you have made that does not necessarily export jobs; because industrial possibly in the past the relationship was too close. Is participation of high quality work both in design there not a fundamental diVerence here, in the sense and manufacturing is frequently made a that you have got a company—although the discriminator in bids. The fact of the matter is, whilst Chairman who came before us last week was holding other nations might be prepared to appear to be the olive branch out—you have a Chief Executive putting more money into sustaining the home base and company which clearly still wants an approach industry, they are demonstrably getting less which is diametrically opposed to the Government’s operational capability for their money as a result. position? I hear what you say about competition. Is We are trying to get a better balance to balance the it not important—not only in terms of a major needs of the taxpayer and the frontline military supplier to the Government with regard to projects, forces to get the right amount of capability and, at but also in terms of what the Chairman is saying the same time, to sensibly nurture the industrial regarding jobs, because it is a major employer in this base. As I mentioned last time, in the context of the country—not just in terms of direct jobs but also Alvis-Vickers proposals (which is a bit further indirect jobs? Unlike you, some of us next year will advanced in terms of public knowledge) there can be have to get re-elected and a lot of these jobs are in occasions where this can be beneficial; where it is communities which we will be asking people to possible that the relatively irregular nature of our support. What I am saying to you is this: getting the own demands for military capability can be relationship right is vitally important, not just in smoothed out by being part of a bigger concern. terms of personalities—personalities perhaps have These companies do want to do business with us, taken over more than the actual policy itself. The and we can set the terms under which that business fact of the matter is, what reassurance can you give, is going to be done. for example, to BAE Systems workers throughout the country that this relationship or bad karma will Q195 Rachel Squire: Minister, I think you have stop; and it is not going to mean at the end of the day already touched on a quote that we had from the they will lose their jobs? Vice-Chairman of Thales-UK, who told us that Lord Bach: I may not have to get re-elected, Mr there is now more dialogue between industry and Jones, but I have a passing interest in making sure Government but there is still some way to go in one that some people do. particular area, which is clarity about what kinds of industrial capabilities and technologies are judged to Q194 Mr Jones: I am reassured about that! be of crucial strategic importance in the long-term. Lord Bach: Your question is a very good one indeed, In your earlier point you were talking about the if I may say so. I think I will go this far: I hope I have technologies in industries which are of the greatest already said it, and that is that the relationship with importance to the country and that time is needed to all our defence contractors—and it goes without do it properly, and you have said a few months and saying, they are a major defence contractor, BAE I think you went on to say maybe longer. I think you Systems—is of huge importance; but that does not will appreciate the general concern that what may be mean lying down and playing dead every time either, already being considered to be areas of crucial for the company or for us. There will be moments in strategic importance could be lost or certainly time when there are diYculties that are sometimes eroded by the time a statement is made of what those blown out of all proportion because it makes a good crucial strategic industrial areas are. Could I ask you story. I think our fundamental relationship with the to comment further on whether there are any interim company is a good one. As you have said, on many, views on what kinds of industrial capabilities it is many projects—large, small and medium—the important to retain in the UK for strategic reasons? Ministry of Defence and the company, through Lord Bach: I agree with you, when you say that there those who are running those projects, work is something of an urgency here in order for the extraordinarily well together. At the top there is a position to be clearer than it is, as to what it is we great amount of contact on a regular basis; and consider to be vital capabilities that we need to keep where we disagree we know we disagree. A message in this country. I have asked that work should to BAE Systems workers would be that the continue rapidly on that, and that is happening. I Government is really committed to that company think we probably have to do it in two phases: one is continuing to play its leading role in defence to deal with some of those possible areas where the manufacture; but it is a private company. It is the matter comes to a head early on; and then the second one that decides in its own shareholders’ interests phase will be having a more comprehensive look at what it does. It is a company with an enormous where those capabilities are unnecessary. I am Ev 44 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton slightly wary of entering into a debate about where longstanding convention that advice to ministers those areas are. It may be that Sir Peter and the was not discussed. Therefore, can I ask you as the General may be able to assist rather more than I can Minister to clarify the position with regard to the at this present time. I think we can all think of the circumstances in which it was decided to go for the areas where these may be so. It may involve Hawk, which has turned out to be an absolutely shipbuilding, for example; it may involve correct decision and, therefore you were absolutely aeroplanes, various types of military aircraft as well. right. Does that not raise question marks about the I am sounding extraordinarily vague, and I know advice that you got which is based upon a policy what you want is some precision. which, in this case, was not a correct policy? Lt General Rob Fulton: I do not know if I have got Lord Bach: If I may say so through the Chairman, it anything to add at this stage by way of specifics. is a very good try but I do not think the convention Clearly we are interested in setting out how we see changes merely because you are asking Sir Peter or the development of capability going forward. We are asking me. I am not going to go into any detail of any looking at the 2008/10/12 timescale. We are clearly kind as to what advice ministers may or may not also interested in ensuring security of supply in the have received on this issue—save to repeat what Sir event of urgent operational requirements. That is Peter said, and I read very carefully your dialogue clearly a consideration. The third area I am with him, which is that this was not as it seems a interested in is making sure that we can sustain in suggestion of some other jet trainer as opposed to operation some of those equipments which we are Hawk; it was more complicated than that, and it had going to keep in operation for a long time. much more to do with competition than it did with Challenger is an example which springs to mind. any other type of jet trainer. That is as far as I am Currently we plan to keep Challenger in service until going to go. I may have even lifted the veil a bit too 2020-2023 perhaps. Clearly we will want to upgrade far in saying what I have. No, I think the decision (if it over time and, therefore, we will need to make sure you pushed me) was the right decision to make. I am that not only can we maintain it but also that we can delighted we made it. It was a government-wide upgrade it. I think I would be wary of being drawn decision; and I think it is a good example of the on specific technologies, but I think there are certain Defence Industrial Policy being put into practice. In parameters. I can see the parameters within which other words, all the issues that there were my part of the business would want to, as it were, ask surrounding Hawk—both value for money, the the question and ensure that it is there for us. importance for the defence industry in this country, Sir Peter Spencer: I could be a little more explicit. As high technology—all these were taken into account. the policy identifies there are already some key areas, There can be diVerent views as to where that led. for national security reasons, which we guard very Ministers views were that it led to Hawk and I think closely, and may include nuclear technology; that decision was the correct one. nuclear, biological and chemical defence; counter- terrorism; and to that I would add cryptographic Q197 Mike Gapes: Did you agree with the view technology. We are also looking in the context of the expressed in an article recently that the Defence main sectors of the industrial base, as the Minister Industrial Policy currently tends to be considered at alluded to, sector by sector. Clearly the one which is a late stage? closest in front of us on the radar screen is submarine Lord Bach: I think there has been a tendency for it and nuclear technology. The fragility of the nuclear to be considered at a late stage. I think on occasions steam raising plant industrial base is well known to it is the sort of thing that has been left, as it were, to this Committee, and that is something which we are ministers to consider when the advice comes up to nurturing on a daily basis, and putting together the them from oYcials. I think that is changing. I think strategic thinking to ministers, which will then need that has altered. I think one of the principles behind to be discussed across Whitehall. We will check the the Defence Industrial Policy, certainly an other technologies on a case-by-case basis as we important part of Sir Peter’s changes under the move though. Surface shipbuilding is another area stocktake, is that all those issues are considered at a clearly where we need a decision on that because we much earlier stage and shared with industry too at a have to make a decision in this very large much earlier stage of the procurement process. I programme which is in front of us, which is more think that is the right way to go. I do not think it than just the two new aircraft carriers, as to how we should just be left to ministers at the end to consider are going to do that with our own industrial base. these wider issues. I think they should be part and You mentioned, rotary wing—clearly we have got parcel of procurement processes from the start. work to do in that area and in the other major areas. Q198 Mike Gapes: Is there a need for you to do more Q196 Mike Gapes: Could I take you back, Minister. within the MoD to get your own MoD staV, and You touched in passing on the Hawk. I had a very particularly those within the Defence Procurement interesting exchange with Sir Peter two weeks ago Agency to think about these things at an earlier stage about the question of the decision taken by ministers and to behave diVerently from how they do now, to overrule the DPA in 2003 with regard to the and in particular in the context of possible export Hawk and the consequences of that. You will be orders? aware that there has recently been the gaining of an Lord Bach: I believe we are on the right path here. I important export contract to India. When I asked think the DIP set us on the right path. Sir Peter has Sir Peter about this he said he there was a continued that process. We are already doing that to Defence Procurement: Evidence Ev 45
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton a much greater extent than we did before. Let me intended to do it like that; it is because we changed make it quite clear that possible exports, whether in the fundamental procurement strategy pretty the Hawk context or in other procurements, are fundamentally at very short notice. always a factor that are taken into consideration at an early point in the procurement. That will continue to be so. I think DPA staV are very well Q201 Mr Jones: Was that pressure on you from the aware of these wider issues when they come to give Treasury or from the MoD? advice to ministers. Sir Peter Spencer: It was not a value for money deal from the point of view of the MoD. We discussed it, as we do with the DTI and other government Q199 Mike Gapes: But ultimately you will not rule departments as we go through. There is continuous out the possibility that you might overrule that contact at oYcial level so that people are aware how advice, as you have clearly done in the past? any particular procurement proposal is maturing. Lord Bach: This is something that happens very There was no dissention from the view that the PFI occasionally. It happened on previous occasions proposal did not represent value for money. I only V under di erent administrations; and it will continue mention that not as an excuse but to put it into to happen. In the end it is ministers’ judgments for context, and say that we then had to turn this thing which they are accountable—whether elected or not. round very rapidly and to resolve the key issue of the I am certainly accountable as, of course, is the value for money decision which ministers were going Secretary of State. I have to say that the number of to take. times on which it occurs is very rare indeed, because the advice we get from our oYcials in the Ministry of Defence in this field is extremely good advice. Q202 Mr Jones: We talk a lot now in government Mike Gapes: I am pleased to hear it. about joined-up government, but clearly with a hundred people made redundant in Brough and the Q200 Mr Jones: You said it was a good example of subsequent cost to the taxpayer that would not be a the Defence Industrial Policy working but why was good use of taxpayers’ money overall in terms of it then, for example, in the case of BAE Systems that what that would cost the UK government, would it? I understand a senior manager was in his car on the Sir Peter Spencer: That is still part of the wider way over to the factory to hand out redundancy factors that ministers take into account. notices and had to be called back when the announcement came through? The workforce have Q203 Mr Jones: What I find remarkable is that you told me that this eleventh hour approach is not good actually came within the eleventh hour or a lot closer for relationships, but also the workforce clearly had than that. If you had a senior manager driving across the threat of redundancy hanging over their heads with redundancy notices ready who had to be called before you agreed to this in the morning. back, is that not brinkmanship to a point which is Sir Peter Spencer: If I could just put this into not acceptable? context. The proposition which came forward had Sir Peter Spencer: You could argue it was been originally to be a private finance arrangement. brinkmanship by the supplier too, because if he were There was no real disagreement between ourselves confident this thing was going to come through he and the company as to whether or not private could have chosen not to threaten to deliver those finance was a good idea for this particular capability. redundancy notices. I think this was part and parcel It was very evident that we did not have the of the negotiation. possibility of a deal which we could present to ministers and to the Treasury as value for money. BAE Systems were not wholly committed Q204 Mr Jones: It comes back to the sour themselves to PFI per se. At that point we were up relationship between BAE Systems and— against some quite considerable pressures on time to Sir Peter Spencer: I do not see these as sour then look at the possibility of a conventional relationships. There are large sums of money here at procurement and understand enough about what stake. My job is to protect the taxpayer; their job is the prices would be, and what the value for money to protect their shareholder; and diVerent companies arrangements would be. Under those circumstances choose to negotiate in diVerent ways. On a personal I would say that the factory was running out of basis there is no sour relationship. work; the company clearly was concerned. We worked extremely hard in a very compressed timescale to bring this thing to a resolution. Nobody Q205 Mr Jones: I think the taxpayer is not just the likes to put people through that sort of anxiety. MoD, is it? It is also, for example, the other 200 There is a proper understanding and a proper people made redundant at Brough. The knock-on sympathy of the individuals who find themselves in eVect of the cost to the taxpayer would be quite those circumstances. There was every intention, and substantial, would it not? certainly very strong ministerial direction on this, to Sir Peter Spencer: I am not arguing with you, get this thing sorted out in a timescale where we did because your remarks are entirely consistent with not pre-empt the outcome by the company in the outcome. I was addressing in particular the Brough literally falling apart before we made the reason why it seemed to come up against a very tight decision. It came good, albeit at the eleventh hour. timescale. I hope that the explanation I have given You can only look at it in the context. Nobody you has made that clear. Ev 46 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
Q206 Mr Havard: You have arrived at the situation before the Committee on 12 May was a very realistic you describe where you decided it was not value for one. I happen to share that view. I think he has taken money, but set aside how you get to that position at a very realistic view of the problems in front of us. the moment. The new Industrial Policy, the Smart The DPA has got into a hell of a sorry state, has it Acquisition processes—you yourself, Sir Peter, not? If I just quote his words to you so you know came and told us of various changes made in your what I want you to concentrate on, he said that own agency. How did all of these new tools and “poor performance” was “endemic” in the DPA, techniques help in that situation? How would they and “there are seven principles of Smart Acquisition help to avoid that process in the future? ... One has been implemented in full ... Of the other Sir Peter Spencer: They had already helped because, six, none of them had been implemented fully ..”, if you think about it, the reason why we had asked and on it goes in that particular vein. You are the for a single tender from BAE—at an earlier stage Minister with departmental responsibility for these before I took over this appointment—ministers had things, when did you first begin to know about the already determined that they did not want to sorry state the DPA was in? compete in this area; they wished to see if they could Lord Bach: I do not think the DPA was in a sorry get a value for money solution via a single tender. state, and I do not think that is what Sir Peter was That is precisely the way the Defence Industrial saying. If you look a little bit further on in the Policy says these things would work. We would not transcript you will see he will say in terms, and I am run a competition and then decide we did not like the not quoting exactly, there had been improvements in result. We would look and ensure that if we were the way in which Smart Acquisition has been going to have a competition then ministers would be brought out, but we had not gone far enough. That content to pick any of the winners so long as they was precisely the point I made after the NAO report obeyed the criteria of selection, which might include was published in November 2002. The Chairman (as I said earlier) industrial participation. It is expressed the view to Sir Peter last time that defence diYcult for me to speak with great authority on this. procurement had been in diYculties for 25 years. I This came to me on day two in the job and we went think it was a characteristic understatement by him. to the Investment Approvals Board on day ten of the I think it was probably— job when I had been abroad for seven days on international business. I am not trying to make Q208 Chairman: 225 years! excuses but in terms of what we would do now— Lord Bach: That I think is probably nearer the mark. what we would clearly do now, and it chimes In other words, we are constantly trying to improve precisely with the themes of what we are doing as the the position as far as procurement is concerned. Minister has described in shorthand as a Governments of all parties have done their best to do “stocktake”, is to be much more organised inside the this. We, in our turn, are doing our best. I think we Defence Procurement Agency at dealing with are doing pretty well. I think the emergence of Smart industrial sectors by sector, rather than project by Acquisition and the bringing into eVect of Smart project with problems that stove-piping has Acquisition is a very important move. I think it has occasionally caused in the past; and we would have already shown some signs of success. It would be a a much more healthy dialogue with all of our miracle if we got this right straightaway, and if we companies, and particularly with the biggest, did not make mistakes from time to time, and if we including BAE Systems, through the new key did not get things right from time to time. I think supplier management arrangements, where we have what Sir Peter has done—if I may say so with him a much healthier, more focused dialogue and that is present without wishing to embarrass him—is to happening. It was helpful to me to hear members have a really good look, after about four or five years representing the DIC acknowledge that was moving of Smart Acquisition being put into practice, and in the right direction. We can measure that now saying absolutely bluntly (and for that I am because part of the key supplier management extremely grateful), “Look, we’re not getting arrangements invite each of our suppliers to give a everything right. There are some things which have report back to us as to how they find our behaviour been endemically wrong for a long time that we still on a project by project basis. Our job is to make sure haven’t sorted out, that we need to sort out”, and to they feel comfortable in being canvassed and we set about sorting it out. I have absolutely no learn from it, and do not just think they are going to embarrassment whatsoever, I have to say, in a Chief tell us good things. We want to hear the things where of Defence Procurement coming in and saying that they believe we could do better. We are getting a lot and setting out some new ways of doing things. I am of that from many of the companies, which is absolutely delighted that that is what he has done. helpful. Please do not think I or any other minister was naı¨ve Chairman: If there is any correlation, Sir Peter, enough to think that everything was absolutely fine between you being away and a British company and rosy in the garden up until that particular point. winning a contract I will give you all my air miles! That is not how the world works. Please write to me and I will write to the Chairman of British Airways! Q209 Mr Cran: Minister, I am quite well aware of that. Ministers have a tendency to come before a Q207 Mr Cran: Minister, if I understood you select committee and quite often answer questions correctly in your introductory remarks you said Sir that have not been asked of them. If I may say so, Peter’s performance, if that is what I could call it, that is precisely an example that you have given us Defence Procurement: Evidence Ev 47
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton now. I asked a very much simpler question than the done, after a period of time, is to have a new face in, one you have answered. Before I ask it again, I make to say “Look, this is what is going well; this is what it very clear to you that we are perfectly well aware is not going so well. We need to change in a whole of what Sir Peter is doing in the DPA. The question variety of ways.” Sir Peter, I think, is the first to say is: what happened before he came along? It just that he has had full ministerial support for that. I do interests me that there were about two years, if I have not think we have anything to apologise for during got my mathematics correct, between your our term in oYce, frankly, in the field of defence appointment as Minister and his appointment as procurement reform because we have started the Chief of Defence Procurement. I would just like to reform, it is a reform that started after the Strategic know what was happening in that two-year period. Defence Review, has continued through various For the purposes of answering, I would like you to ministers, through me and, no doubt, will be ignore what the Chairman said about procurement continued by my successor. So, no, I am absolutely being in chaos for 225 years. What happened in that content with the way in which things have gone. two-year period? Lord Bach: As you know, the DPA was set up, Smart V Q212 Mr Cran: I guess the taxpayer is entitled to ask Acquisition principles were put into e ect by Sir when this is going to get resolved. Is it going to be Peter’s outstanding predecessor, Sir Robert next year? The year after? That year after that? To Walmsley and I, working with Sir Robert, was quote Sir Peter, he said: “My judgment is that there looking all the time at how this was actually will be a problem next year” (which I presume is progressing. During that period of time I do not 2003/04). “It is unlikely to be on quite the same scale think anyone would have said it was working as 2002/03”. Then he said, and I would like you to perfectly well. Nor would we have said that it was a address your remarks to this particular quote of his: disaster. We were learning all the time. What I “There is a systemic problem”. That would get the learned during those first two years, or nearly two alarm bells ringing in my head very quickly. “There years as it was before Sir Peter was appointed, was is a systemic problem”. What do you construe a that Smart Acquisition principles were appropriate “systemic problem” to be? principles; putting them in eVect was a good deal Y Lord Bach: I think the expression is “has been a more di cult than the principles themselves. I do systemic problem”. Sir Peter will be the one who not think there is anything unusual in that at all. will— There was not a morning when I woke up and suddenly felt what I thought was going brilliantly in fact was not going so well. Ministers I think, I hope, Q213 Mr Cran: It does not say “has been”—“There at least have the ability to know that some things are is a systemic problem.” I can quite easily ask Sir going well, some things are not going so well, and Peter, but, as the Minister responsible, I would like there comes a moment when a new face comes in to you to tell me what that means. I would like you to head the DPA and decides that something decisive tell me what you are going to do about it. has to be done, and I am delighted that Sir Peter has Lord Bach: I think there has been a systemic problem done that. in defence procurement for many, many years. What all administrations have sought to do is to make the position better. We are no exception to that. The Q210 Mr Cran: Again, we are delighted Sir Peter is Y systemic problem, as I see it, is that we are involved doing it too, and I have no great di culty with that in spending a large amount of taxpayers’ money in at all, but the taxpayer might take rather less of a an extraordinarily complex field. The judgments view than the view you have just taken; the view that, that are made have a profound eVect on whether we in fact, I guess, it has cost the taxpayer rather a lot get the equipment that our armed forces need. We of money and that we did not have the DPA have not always done it as well as we should. Smart applying the principles that Sir Peter says should Acquisition, with its principles being brought into have been applied, and so on and so forth. The V V e ect, we think, can do a lot to resolve the systemic taxpayer might take a di erent view of this. problem of defence procurement down the years, Lord Bach: I do not think the taxpayer has lost out. but we do not believe—and I do not think the Committee should believe—that that can happen Q211 Mr Cran: You might have expected, on the overnight or within one year or five years; it has to first day of your appointment, if you had known that be done gradually. I think our achievement since defence procurement was in such a state for God 1997 in this field is actually quite a good one. I do not knows how many years before, from day one to act. think the taxpayer has lost out as a result. You, I I just get the impression, looking in on it, it did not think, were quoting Sir Peter in relation to the happen very quickly. National Audit OYce report of 2003 when there Lord Bach: I think I did act. All ministers when they were—and you may have heard me on the media the come to their post look and see what the position is, day after it was reported—some very disappointing take advice and try and move the process forward. figures in terms of cost increases and time delays, Here Smart Acquisition had commenced as a particularly as far as legacy projects were concerned. consequence of the Strategic Defence Review; it was Some of those projects, of course, started as long ago being set up, it was in its infancy, the DPA down in as 20 years or were thought about as long as 30 years Abbey Wood was pretty new as well, and things were ago. What I am saying to you is that I think we are progressing—we were advancing. I do not think the improving. I think we needed someone like Sir Peter taxpayer has lost out at all. I think what we have to move us forward faster. Ev 48 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
Q214 Mr Cran: Minister, you can see the diYculty to accept that. Can I ask one other question, and that I have and, I guess, anybody else looking in on that is all I do want to ask? What is your timescale this discussion would have. You started oV saying for getting the Defence Procurement Agency into— that we are really getting to grips with it, and I have now, I had better choose my words carefully—an no doubt that that has happened, and Sir Peter has eYcient organisation? Have you got a timescale for convinced me that that is the case. You put alongside that? If not, why not? that the quotation he gave us that “There is” (not Lord Bach: I am sorry to disagree with you but my there has been) “a systemic problem” and, I am view is, and I think it will be Sir Peter’s, that the DPA afraid, you have failed to convince me thus far that has always been an eYcient organisation; that it you know what the systemic problem is within the could do better— DPA. Lord Bach: I am sorry if I failed to convince you. I hope I may have had— Q222 Mr Cran: Minister, we really are dancing around with words. I read the quote again: “There are 7 principles of Smart Application. Only one has Q215 Mr Cran: What is the systemic problem? What been implemented in full.” That is not eYcient. is it? Lord Bach: I think the DPA is an eYcient Lord Bach: This is a question you should ask Sir organisation and has been since it was set up. That Peter, obviously. it has not done as well as we would have liked it to have done is undoubtedly true, but to suggest, as I Q216 Mr Cran: No, I am asking the Minister who is think you were suggesting, that somehow chaos had responsible. I will get on to Sir Peter in a minute, but reigned, is just completely untrue. we did have a bellyful of him a few weeks ago. Lord Bach: That is not the way I would put it. Q223 Mr Cran: Chairman, I just have to have one Q217 Mr Cran: I am sorry? other question here. We just have to understand how Lord Bach: Having read the account, it is not quite we put together the fact that of the 7 principles of the way I would put it. Smart Application only one was implemented fully. If that is not ineYciency, what is it? Q218 Mr Cran: I am not getting very far with this, Lord Bach: The DPA is much more than, frankly, Chairman. Just one other question. I was surprised just that. It is an organisation that is responsible for that you said that the taxpayer had not suVered in providing the British Armed Forces with the terms of cost and so on, as a result of the chaos—I equipment that it needs. In terms of doing that, I suppose it was—within the DPA. think it has, on the whole, been an eYcient Lord Bach: Are you quoting Sir Peter when you say organisation and better than what preceded it. That “chaos”? is what I mean by “eYcient”. Mr Cran: Minister, I have no other questions, but I Q219 Mr Cran: No, I am using my word. You did find your answers singularly unconvincing against not say that? the NAO’s report and against what Sir Peter said to Lord Bach: No, you said it, and I wondered whether us two or three weeks ago. you were quoting Sir Peter. Q224 Chairman: I hope you are not in court, Mr Q220 Mr Cran: Would you tell me though if the Cran, when Lord Bach is acting for the prosecution MoD has quantified the cost to the taxpayer of the when his tenure ends. May I say, frankly, I think you non-application of these 7 Smart Acquisition are doing a very good job. You are grossly principles—for any time period that you would like underpaid, and you should see your trade union rep to choose? to get a rise. I do not wish to add to what Mr Cran Lord Bach: It would be impossible to quantify that said, but basically I think I share his view that there cost, and I think, Mr Cran, you know that it would is a systemic failure in the British Government, in be impossible to quantify that cost. Smart that you wait for a crisis before anything is done. We Acquisition is a recent invention. It began with the are only wishing to ask what internal feedback Strategic Defence Review of 1998 and has been put mechanisms are there so you can pick up problems in practice since that time and, in my view, put into before having to wait for a new Sir Peter to come in practice fairly well. Perhaps some of those 7 and then try to clean up the stables? Surely there has principles should have been put into eVect more to be a process by which you have people sitting clearly before Sir Peter arrived. I accept that. alongside Sir Peter, or nearby, so that if the alarm Whether that has cost the taxpayer any quantifiable bells are ringing—albeit not too loudly—the amount of money I would somehow doubt. feedback process is such that you can take corrective action rather than waiting for a major study and Q221 Mr Cran: As I taxpayer, I should like to know. then Mr Cran jumping in and questioning about As a taxpayer speaking to the Minister, I would have how the whole process operates. I hope Sir Peter expected you to have done that, to have found out lasts a long time in his oYce but when he leaves and from the beginning of Smart Acquisition, to where is replaced I hope there will not be somebody else we are now, or in any other time period that you coming along having to make a fundamental review would like to choose, what the cost to us has been. because the MoD ought to be able to pick up these Obviously, you have not done it and we will just have things more successfully. Defence Procurement: Evidence Ev 49
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
Sir Peter Spencer: Chairman, could I make a Peter had expressed his words not in terms of statement, just to clarify? We have accepted that this cricketing analogies but of footballing, it is a bit like is a very big, complicated and diYcult problem to Leicester City played 20 and 5 points and Walsall, if tackle. I would have to say that the work which I I dare, as opposed to a batting average of 5 having have put into place did not just begin with my played 20. Maybe it would have brought it home arrival; there was a lot of work which I picked up more graphically by particularising and expressing it which had been put in place by Rob Walmsley and in footballing terms. by David Gould, who remains my very excellent Lord Bach: I stand corrected. I am glad you deputy. So it would just be dishonest of me to try and mentioned Walsall, Chairman. claim any particular personal credit. Inevitably, on Chairman: I am sorry we are not going to be in the arrival I did something called “due diligence”. I same league as you, Lord Bach. examined the bottom line and discovered that the sort of worrying signs that had already been picked Q226 Mr Hancock: The Chairman and I have both up—and which the Minister picked up, as I said been on this Committee long enough to remember earlier, as long ago as 2002—had indeed developed when your predecessor came into this room full of rather worse than we had hoped. The reason for that the joys of Smart Procurement and told us how is that to start with in a comparison of project much it was going to cost to set up this new performance of those which we, in shorthand, badge operation and all the benefits that were going to be Smart projects as opposed to legacy projects, they there. Some considerable time has elapsed since were clearly doing very much better, but as was then, and I remember asking the question “Tell us forewarned by some of my own people and what Smart Procurement is” and Sir Robert confirmed by the National Audit OYce, if you look Walmsley spent some considerable time explaining down into the detail there were worrying signs of to us that it was a concept he was on top of and the consumption of what we call risk diVerential, which whole of this agency was behind him and we were on indicated in a project which was at a relatively early our way. I asked the question did he believe that we stage that you needed to be very careful. The were smart enough to implement Smart Minister cannot respond in the absence of hard Procurement. He said “Of course we are”, in a rather evidence of something. It was not really until we got aggressive way—very similar to your response, I the MPR03 report, which was produced just before must say, having been taken aback by Mr Cran’s I arrived, that we began to realise the extent to which probing questions. Well, it has cost us £500! this was happening. So all of the sort of instincts that million to set your agency up and you go consistently people had, that we had to be wary, suddenly were down by several billion every year on overspends confirmed quite dramatically and we then, as I said and overruns on contracts. That, to me, is something to you before, had to confirm whether or not this that we should seriously question. You are looking was a one-oV blip, and a lot of the damage there was surprised at the figures. The figures are arrived at in from the legacy project. We had to clear away the answer to questions that have been probed in legacy thing and take a look at the Smart projects. Parliament, and Smart Procurement has cost That has confirmed the diagnosis. So it is not as stark anything between—because we cannot get a smart as it might have appeared to have come out in the answer on it—£500 to £900 million to set all of this discussion. I do not want to try and claim credit up. None of those real benefits have come back to us. which is not mine. I do not believe it is reasonable to It must be possible, Minister, for you to give us some expect me to sit dumbly alongside the Minister real assessment of what the real costs are and what when, in fact, he could have only responded to the so far we have achieved since Smart Procurement? evidence which I then began to be able to present to What have we saved? You can only blame legacy him, but he was already aware of it and had already issues for so long, can you not? 1997 seems a long put in place himself much of the continuation of way oV now. work. What my arrival did, if you like, was to give Lord Bach: I apologise, of course, to Mr Cran if you us an opportunity to really convert it into something thought I was being aggressive in my answers. I which had to be addressed with some urgency—and thought it was a Parliamentary Committee and— urgency is the key word in all of that. There is huge Mr Cran: Who said that I thought that? buy-in within the Ministry of Defence, within the DPA and with industry; we are all in this together, Q227 Mr Hancock: I thought he was being trying to make it work. The need now is to look to unnecessarily aggressive to you, James. the future and to press forward. Lord Bach: I thought it was an excellent exchange and I thought Mr Cran, if I may say so, made his Q225 Chairman: Thank you, Sir Peter, for your point extremely well. frankness before us. It is not something we get as a matter of routine, and even though we are asking Q228 Mr Hancock: You did not answer them tough questions we greatly appreciate the fact that though. He made them very well, I agree entirely you are prepared quite honestly to come before us with you, Minister, but you did not answer them. and say what the situation is, because it is in all our Lord Bach: Let me try and answer you, Mr interests that Smart Acquisition really, really works. Hancock, then. I think you seem to believe that Yes, there have been problems but it would be history began in defence procurement in about 1997/ unbecoming of us if we did not say we would like, as 1998. We have had decades of HCDCs and their you say, to see far more from its role. Maybe, if Sir predecessors, I have no doubt, complaining that Ev 50 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton costs have risen too fast, that there have been too would be eliminated, or at least drastically reduced. great delays, that projects have been undertaken But it is now increasingly perceived as the start of a which should never have been undertaken. All of long struggle by the MoD and its suppliers to obtain that has been kind of washed away in your question. greater eYciencies and avoid costly overruns. It is What we tried to do from 1997/1998 on was set up a evident that the transformation which Smart new system under new principles, and we are Acquisition hoped to deliver is still incomplete.” Is working our way through it. We have made that the realistic assessment of where we are with mistakes, and we will continue to make mistakes, Smart Acquisition? but I think, on the whole, there has been progress. Lord Bach: I do not think I could have put that You talk about the cost of this. On a kind of detail better if I had written the article myself. Anyone who point, the relocation costs to Abbey Wood were met saw a kind of religious basis of Smart Acquisition, in full and repaid themselves well before Smart that somehow these were the tablets from the Acquisition began. I do believe that you are also mountain and therefore all our problems were leaving out the fact that there has been progress in over—anyone who even had suggested that—was this field, which Sir Peter just now has re- entirely wrong. We are living in the real world, and emphasised. There has been progress, we are moving I think the author of that paragraph has got it forward. It would be a much more depressing scene about right. if we were not. So we are doing that. It is no good you just dismissing legacy projects, with the greatest Q232 Chairman: The author is one of the advisers to of respect, by saying “We have heard too much our Committee. about legacy projects”; the vast majority of the cost Lord Bach: If I had known that I would have increases and time delays pointed out so well by the flattered him even more! NAO in their report of January this year relate to legacy projects. Q233 Mike Gapes: I would like to bring General Fulton in on this interesting discussion, because Q229 Mr Hancock: Minister, you make the point clearly as the head of, in a sense, the customer about legacy projects. Your predecessor, sitting in organisation do you agree with the Chief of Defence that seat, said “One of the advantages of Smart Procurement that poor performance was endemic in Procurement is, of course, we will be able to deal the DPA? with the issues of legacy projects and we will be able Lt General Fulton: I do not know because I was not to say it is not very smart to continue with them.” It there at the time. I clearly am concerned on behalf of is not very smart to go on dealing with some of these the end-user if the resulting equipment does not do issues in the way we have. Yet the NAO reports what the front-line command want it to do; I am consistently say there has been no change in that. clearly concerned on behalf of the end-user if it takes Lord Bach: I think it is fair to say that there have longer to arrive and I am clearly concerned for my been greater problems with the legacy projects than own sake in terms of running an aVordable perhaps we anticipated those years ago that you equipment plan if it ends up costing more, because quote. Some of those projects, as I said to Mr Cran, the eVect of that is to have an impact on other are really quite old now and it is they that we have programmes in order to balance the books. So, yes, found diYculties in dealing with. That is what the I am concerned by the outcome, but I do not think NAO report made clear. If you want me to go that that you can separate the strands because we are part far I certainly will in saying that perhaps we of that as well, in terms of the role that we play. We overestimated then the eVect Smart Procurement are clearly identified as part of this rather than sitting would have on dealing with those legacy issues. You outside it and receiving the result. are not saying, are you, that we should have abandoned some of those legacy— Q234 Mike Gapes: Is there not a real problem? If you have got, as the National Audit OYce have pointed Q230 Mr Hancock: We are. out, a £3.1 billion cost increase in the year 2002/03 Lord Bach: What, we should have abandoned and on-going increases in costs of legacy projects or Typhoon? other projects, that puts you under very diYcult Mr Hancock: We will come to that a bit later on. pressure. How do you manage to live within your When you give us some answers to that maybe we budget and how do you deal with it? will know how to make a better judgment on that. General Fulton: In terms, firstly, of the £3.1 billion, of course—and I think this has been pointed out Q231 Mr Harvard: We want to deal with various before—a substantial part of that is interest on aspects of Smart acquisition, but on the generality of capital, and while that is paid within the DPA that it we have had a report sent to us from the Defence means that it is not being paid by Strike Command, Engineering Group, written by Professor David on to whose books it would go. So while the point of Kirkpatrick. It is interesting in the sense that it bores principle is right, that cost has increased, the sums into some of the various elements of the Smart are not as large as that. Acquisition process, but it is the conclusion that I find interesting. Is this where we really are? It says Q235 Mike Gapes: How large are they? “Smart Acquisition was originally presented as a Lt General Fulton: I would have to— wondrous revelation whereby all the perceived Sir Peter Spencer: About 40 per cent is the interest problems of the MoD’s organisation and processes on capital. Defence Procurement: Evidence Ev 51
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
Q236 Mike Gapes: Forty per cent of 3.1 billion, so Q240 Mike Gapes: So you are part of the systemic we are still talking about 1.4 billion, or something problem as well? like that. Lt General Fulton: No. We were set up as part of Sir Peter Spencer: I was merely answering your Smart Acquisition. The establishment of an question on numbers. empowered customer was the principle that is considered to have worked; the establishment of an Q237 Mike Gapes: It is still a very large amount of empowered customer who not only owns the money, is it not? requirement but also owns the budget. I therefore Lt General Fulton: It is. In answer to the point of not only have the opportunity of constructing a 10- principle, about how do we live within the budget, year programme but I also have the responsibility of what I have to do is to produce an aVordable recommending to the Defence Management Board equipment plan every year and the upward cost of something that is aVordable but will also be fit for equipment is but one part of the issue with which I purpose for the armed forces. I do have an interest, have to deal. I also have to deal with, as it were, as the programmes go forward in conjunction with living within that part of the overall defence budget CDP’s people, in making sure that those which is allocated for equipment and clearly there programmes deliver and, as problems arise, dealing are pressures in the people area, there are pressures with those problems. in the infrastructure area and there are pressures in the training area. So the whole issue about what Q241 Mike Gapes: Can I put it to you, though, that proportion of that whole budget is going to come to if you are having things moved to the right and equipment is also part of the pressure on me. There delays in equipment coming through because of cost is further pressure on the equipment plan in the sense overruns, and your job is to get the best equipment of a desired shift in investment from quantity of to our men and women for our forces at the time that equipment to quality of equipment and, therefore, they need it, it would be much better, would it not, we need to find headroom in order to make that if you had more control over the system, making possible. Of course, one of the principles that has decisions as to when that would come and how it come through very clearly from the stocktake but would come, rather than being dependent upon an was also there with Smart Acquisition is to increase organisation of which you are not—although you the amount that we invest in the early years. All of are involved—directly in control. this produces a very complex set of issues but the Lt General Fulton: We are in control of managing bottom line is that I have to produce this aVordable that forward budget. As I say, cost overruns are only plan. How do we do it? We do it by looking right across all the programmes and looking at where we part of the rebalancing, because some of the can either delay programmes, where we can de-scope rebalancing we may want to do in order to conform programmes in terms of the numbers of equipment to Departmental strategic guidance or in terms of a or de-scope programmes in terms of what they will new operational situation. We may actually be produce. So individual cost increases is only part of causing some of the problem because, in order to a very complex problem. make space in the early years, in order to fit something new and urgent in, that may mean that actually we have made life more diYcult for the Q238 Mike Gapes: Can I put it to you: given that you DPA because they then have to juggle programmes have to deal with the realities of the consequences of which were going along in an orderly fashion. So this the problems which have arisen because of this Y is not, as it were, them wrong and us right; this is part di cult endemic, systemic problem, is there not a of an interactive process which we have both got to strong case for letting your organisation take over work on together. the responsibility of procuring the equipment that Mike Gapes: Perhaps we will come on to the you need, given the past failings of the Defence questions of budgeting later on, but I will leave it Procurement Agency? there. Lt General Fulton: I am part of that process already, in that I produce and manage the 10-year equipment programme and the money goes to the DPA in-year Q242 Mr Jones: When Sir Peter appeared before us for them to spend. So they manage the in-year. on 12 May he referred to the “stocktake” that was taking place as part of Smart Acquisition. Could you Q239 Mike Gapes: But you do not control it; you are tell us where that is at, at the moment and how the dealing with a situation that is not under your things you find out through that stocktake are going control. to be implemented? Will that lead to some Lt General Fulton: But I am dealing with a situation fundamental changes in terms of Smart Acquisition that looks at the 10-year forward plan, and in and will it lead to what I think we all require, which balancing out that plan what I have to do, or what is faster, cheaper and better equipment? my people have to do, is work with CDP’s people in Lord Bach: I am going to pass on, obviously, with order to work out how we can bring the requirement your permission, Chairman, to Sir Peter to speak on down to match the resources available. So, in the this, because he is the author of the stocktake. I just sense in which you put it, we are part of dealing with want to make a preliminary comment (I think, the totality of the problem, so I do not think you can perhaps, I have done that already): that the separate any one part of this problem from any stocktake and the actions that have been taken have other. the absolute and full support of ministers. Ev 52 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
Q243 Mr Jones: Before you move oV that, Minister, diYcult and complex projects—in other words, to can I ask you what is the process in terms of your role move on from trying to transfer all of the financial in terms of at what stage do you actually get the risk on the way but have a better understanding of recommendations of your desk? Is it on a rolling what those risks were, where the balance of risk lies basis or is there a set time period when they come and to have a contracting strategy which is more across your desk? appropriate. That is fully supported by industry. Lord Bach: During the course of Sir Peter’s first There is a lot of work going on. The final bit was the year—we meet, as you will imagine, on a very reorganisation. You made the point a year ago that regular basis indeed—he has kept me informed of some people had said to you it all looked a bit the results of, really, his due diligence exercise over messed up and it was diYcult to see much structure the course of the year. As that has developed, as in it. There was a structure and that actually served these ideas have been put into writing, we have a useful purpose, but we have moved on beyond that discussed them more and more fully and he has point now. To get more coherent management, both really taken the action that he has—and it is for him of our outputs but, also, in the way in which we deal to speak, of course, on this—having, as it were, in a with industry, there are certain ways in which we sense, cleared it with me as to whether I am content have reclustered, and having together projects which that this is the way he should proceed. I have to say share the same technology and, therefore, usually that his ideas have always appeared to me to be the same industrial base does actually give us a much common sense and a sensible way forward. He does better feel that they are in natural groupings now. have, which I think is useful, full ministerial backing Importantly, we needed to look towards General for what he is attempting to do. Fulton’s team, his top-level team, in a way which Sir Peter Spencer: I started with the bottom line in was easier for them to handle so that, in the main terms of how we are going to get the best out of the now, one of this senior people, the so-called Agency, and there are three components: people, capability managers, will look towards one of my processes and the organisation. The most important operations directors and there will be a very heavy but most long-term is to make sure we have got the overlap of 80 per cent of commonality, although it right skills in the Agency. We are putting a lot of will not be exactly the same. That makes the eVort into ensuring that we have embedded technical coherence between the two organisations better as and scientific skills in projects of high risk because, well. So in that respect we have done a lot of stuV too often, decisions with the benefit of hindsight both within the Agency and between the Agency have been made in absence of the full understanding with industry. The point where the ministerial of the technical framework in which those support has been so important and so valuable is judgments have been made, and we too often read making sure that the real consequences of spending that technological problems were the cause of a cost more time on de-risking propositions and taking overrun or a time extension. We similarly need to more care are understood across the rest of the invest more into developing PFI skills so that we do Ministry of Defence, and that the right sort of the business more promptly, cut the deals more adjustments are made in the planning and quickly, and actually move on. So far as processes programming assumptions so that we can actually are concerned, there are lots of quite detailed work deliver them. On that basis we have had a delivery streams here. The most important part of it is what plan with key milestones which I report against to we actually do to de-risk the proposals and how we the Minister or the Steering Group which Lord Bach make better use of the assessment phase, how we chairs, and in future against net benefits which we understand not only the technological risks but, will identify in terms of how we drive these things also, what I can call in shorthand the supply side through. I am trying to make this thing open and risks—how we understand the industrial base issues. transparent. It will not yet be the perfect solution We are putting a great deal more eVort into a because the problem is so big and complex. It is compliance regime with standardised best practice, considerably more, I believe, likely to improve the particularly in terms of assurance, and challenging performance than had we done nothing, and we are reviews of projects on a regular basis by my board learning from it as we go along. directors. Q245 Mr Jones: Openness and transparency will be Q244 Mr Jones: Has this been done on a project-by- a first for the MoD, for me. If we have you back in project basis or are there some generic things that go a year’s time or two year’s time what will you be able across all projects? to point to that has actually succeeded, in that you Sir Peter Spencer: For the big projects it is project- have met certain milestones? Is it going to be, if we by-project basis. There are 700 or more separate are going to be open and transparent, that you will projects at Abbey Wood, of which the majority are be able to come to us in two years’ time and say relatively low value, below £20 million, so we tend to “These are achievable”—not just individual projects handle those as so-called clusters when we do the but overall benefits? What is it that you are likely reviews, but we clearly start with the big, to say? complicated ones first. Then, very importantly, there Sir Peter Spencer: It will be the revised key targets is the work to do better with industry, both with the which are tougher than the previous set, set by Lord key supplier management initiatives and also Bach, because he needs to have earlier visibility and together with the industry looking at much more a more sensitive read-out of performance, to get appropriate ways of contracting for the more earlier signs that we are beginning to drift oV. These Defence Procurement: Evidence Ev 53
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton key targets will be laid before the House either at the performance—speed of aircraft, turning rate of end of this month or early next month as part of the aircraft, the number of targets a weapons system can normal run. engage in a certain time, kill probabilities and so on and so forth. So I make no apology for, as it were, Q246 Mr Jones: What are they? pitching my initial bid high. By the same token, Sir Peter Spencer: It is meeting the key however, I have also got to be an intelligent requirements, increases or decreases of cost in-year, customer and my people have got to be intelligent slippage in-year, customer satisfaction by customers in terms of understanding what is independent survey, the value of the assets delivered realistically achievable, and the IPTs are a key part to the front-line against the planned value in-year— of that, but also the research programme is part of in other words, do we meet our delivery targets— either telling us what is available or helping us to and then three eYciency targets which have been understand when these things might be available. So taken from the private sector to be genuine measures we have to balance out being a demanding customer of eYciency, such as ratios of the value of the assets with being an intelligent customer. Crucial to that, we deliver in-year as a multiple of the operating costs of understanding where you have got to come down of the Agency, and we would expect that number to from that high level of performance, is actually the move up over time to prove that we are becoming visibility of what it means—visibility for my people more eYcient. There are two other similar targets on “If you trade this performance then it can come as well. in at this cost and this time”. I think what we have not always had up until now is that full cost/time/ performance visibility to enable us to do it, so I Q247 Mr Harvard: One of the guiding principles of would be the first to say that there have been Smart Acquisition was that there should be “a occasions where my people have stuck out for that greater willingness to identify, evaluate and high level of performance, and I do not make any implement eVective trade-oVs between system apology for that, but we can do better. I think the performance, costs and time.” If I could ask other area in which we are becoming very much something about that, why has there been—and better is understanding how we can grow capability maybe there has not but it is perceived, anyway— incrementally. I think in the past, perhaps, if you unwillingness or reluctance by various people to go came oV the top level of performance it was either along with that and see the benefits of that? Are there “You have that performance or you do not have it diYculties within the MoD, within the customers or at all”. I think we—and I think technology is helping the DPA itself? Where are these barriers to actually here—are seeing plenty of places where you can promulgate that properly? bring in a capability and then by software additions Lord Bach: If I could just start on that. Obviously, you can grow back to the capability you wanted over the experts are sitting on either side of me, but let me time. Therefore, people, by the same token, are just say, from where I sit, that this has clearly been increasingly ready to adopt that sort of approach. I one of those areas, or one of the principles of Smart would hold up my hand to say that the customer is Acquisition which, as Mr Cran put to me so one of those who have been making life patchy for forcefully, has not been successful up to this stage. the DPA in the past, but I would also say that that There are various diYculties with it. In any is widely recognised and we are doing better. organisation people sometimes have a vested interest in what it is they have set up and what it is they want, and are reluctant to compromise that for Q249 Mr Harvard: Is that one of the ways in which, what they may see as not particularly good reason. I with the very quick technological and environmental think what we have learnt, and I think it is very much changes, you balance speed of acquisition against part of what Sir Peter is changing here, is that getting the damned thing right at the end of the day without these trade-oVs we find ourselves in a to do the things that you want to do? position where costs rise and delays take place. So Lt General Fulton: Very much so, but it is at that very we really have to be, I think, more strict and strong high point of technology where our capability edge about insisting that trade-oVs take place in order to comes. Clearly, with that capability edge comes risk. achieve the results we want. So the point is not only pertinent to this need to trade between cost, time and performance but, also, the Q248 Mr Harvard: When you came to see us last point that has also made and which Sir Peter made time, Sir Peter, you said this was patchy. What I am the other day, of spending money in the assessment trying to drive into is why it is patchy and what are phase to do that de-risking so that we understand the barriers and where are the barriers? They before we go into manufacture what the actual probably exist in all these organisations and others implications of asking for that full capability are. So to some degree or another. What can you do to help these two are very closely linked, which is why, in us on that? response to Mr Gapes’ question earlier, I said we are Lt General Fulton: I am probably one of those to part of this, rather than sitting on the outside and, as whom you are referring. I make no apology for being it were, looking in. a demanding customer on behalf of the front-line commands for stating the requirement in capability Q250 Mr Harvard: On the de-risking element, terms and pitching it high, because I think that is certainly the assessment that is ascertained is an what our armed forces deserve. I do not mean gold- important tool in achieving these ends. It seems, plating, I mean demanding in terms of historically, there is good empirical evidence that Ev 54 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton shows that if you do not do that then you end up Sir Peter Spencer: No, I am not saying that at all. In with problems. There is also a lot of evidence that fact, all this is being done with a lot of— shows that maybe that is not happening as much as it should do. As I understand it there is a target or a suggestion of 15 per cent of the spend should be for Q252 Mr Harvard: I might say that about some of this. Is that sort of sum written in stone? Obviously them, by the way, but that is for me to say, not you. not because it would be stupid to have it that way, Sir Peter Spencer: I do not conduct my negotiations but how do you monitor and measure that, and to in public places. Clearly a lot of people who have what extent is that a really important indicator and “learnt the hard way” by signing up to highly a pressure that you apply in terms of contract incentivised contracts and taking a big financial hit formations? have lost their appetite for doing this sort of thing Sir Peter Spencer: It is certainly a very useful crude anyway. We have learned together here, and indicator for one of the more complex programmes hindsight is much easier than foresight. My point with a good deal of development in it. It is not a very has been both within the DPA and across defence good indicator if it was a repeat buy of a relatively that we cannot keep treading on the same alligators low-technology product. So you clearly have to in this swamp. We know where they are now, we judge each case on its merits. In addition to that, we know what to do about it and I cannot guarantee are increasingly developing verifiable metrics in there are not any other alligators there, but one thing terms of the extent to which we de-risk the that decades of procurement has taught me is technology. There is quite a useful table of things humility; it is very dangerous to actually make grand called technology readiness levels and, also, at the statements about what is out there, it is unknown. next level up, system readiness levels, which you can We manage risks, but there are certain key principles look at. As a generality we would say you want to be which, if you apply them consistently, seem to get about TRL 7 or 8 to make the capital investment you into less trouble than if you do not and, on an decision, ideally. There is a certain amount of encouraging number of occasions, give you what subjective judgment on this, depending upon the everybody will admit is a successful outcome, and technology, but if part of the proposition, as it is that is where we want to be. My aim is to be boringly, now, is that every proposal will have somebody repetitively, uninteresting because we keep on doing outside of the project as an non-advocate bringing these things on time and on cost. their judgment to bear as to what extent you de-risk that technology and you de-risk the system readiness levels, you have got a much better understanding of Q253 Mr Harvard: By the way, we can give you a list where you are at. I mentioned the Sonar 2087 project of people you can write to and give that advice to. the other day. That was a very good worked example You talk about openness, which I think is very of that; they worked on maturing the technology, welcome and necessary because otherwise they worked on maturing the system integration, understanding will not come from all the various and they created their own luck, in a sense, because communities that need to acquire it. That is quite that is what they have done. What we have got to be clear. Maybe that has been part of the problem in the careful about is we do not simply slap on a 15 per past. There is an approach being developed, and it cent overhead to every single investment proposition will come out later, on new system houses, more because it would not necessarily be well spent. A lot project management activities and emphasis on this of this is also the intellectual investment that you assessment phase. Are these all part of the drivers, make. So we have got to the point now where, as the the tools and the techniques, then, that we will see Minister alluded to earlier, we do not look at a date and people should understand in the process, in in the sand and say “We have got to go through main order to achieve this? gate on that basis; that is an anchor milestone and on Sir Peter Spencer: Yes, and I accept that there is an it hangs the future of a project”; we can give an obligation on my part to keep people aware and indication when we expect to achieve that date but, informed of what it is they are doing, how we are more importantly, we are looking at the independent doing and how we are getting on. There is a strong assessment of the maturity of the proposal, both in emphasis on the dialogue with industry and there are the technological domain and in the supplier a lot of levels at which this is done. There is a strong domain. emphasis on the dialogue within the Ministry of Defence and between the Ministry of Defence and Q251 Mr Harvard: You are laying out generally other government departments. I have to say, in the there these sophisticated changes, the process and context of that, and demonstrating what we are measurement and approach to contract formation, doing, the Committee has not been to Abbey Wood and so on. Is the big problem that industry does not for a bit and you might find that to come down and understand it? Are you going to tell me that you are have a look at this project, to see the work strands, making all these changes, you are getting smarter in to meet the people who are doing it and see the the acquisition process, you are putting all these measurable process, would give you a little bit more processes in place, you—the customers within the time to be able to get to feel comfortable with some MoD community (if I can put it that way)— of the detail. We can only really go through it in understand the processes, but the rest of us do not headlines here, Chairman, and there is always the and industry does not do it and they are not smart danger that it sounds a little bit glib. There is a lot of enough about making the change? collateral; a lot of people doing a lot of quite detailed Defence Procurement: Evidence Ev 55
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton work in order to sort out the issues. The diagnosis is Lt General Fulton: Do I worry about it? Yes, I do. I the easy bit, delivering the cure is going to be a lot worry that what I am responsible for is delivering to tougher. the armed forces the best equipment capability that Chairman: A few contentious questions now. This I can, and no, I would never be satisfied that I had has been the easy bit, up to now. done everything to bring that about. I said earlier that I am, as it were, paid to be a demanding customer and, therefore, I will continue to demand Q254 Mike Gapes: Can I get back to the question of the best possible outcome that I can for the money budgets and funding money? We were told by the that we have got. I explained earlier that we Chairman of BAE Systems on 5 May that “It is very rebalance the equipment programme each year. clear to all of us on the industrial side at the moment That is re-costed and then rebalanced both taking that the budget allocations that are made today are account of this continual upward cost pressure from Y not su cient to sustain the existing levels of industry, on the one hand, but, also, the desired capability that we have.” He also said it is “going to strategic shift to have the sort of eVect that the require us to actually downsize substantially UK Minister has just described. That recommendation V capabilities to meet a ordability.” Can I ask the goes from me up to the defence management board. Minister and, also, General Fulton, do you agree So that plan is only as good as the realism on which with that? I am worried about it. it is based, and the realism that the DPA can give me Lord Bach: I do not agree with it entirely. The is based on the realistic costs from industry. So Spending Review of 2002 settlement did represent everybody is part of this. This comes back to the the largest sustained increase in defence spending for phrase earlier about needing to get away from those 20 years, adding about 3.5 billion to defence estimates being overly optimistic because I cannot spending over three years. You know, because you plan on over-optimistic estimates because then they discussed it with Sir Kevin Tebbitt on 12 May, the come back to haunt me in subsequent years. What I PUS at the Ministry of Defence, that there are need is a realistic assessment of what it will cost us to significant pressures on the defence budget. We fully deliver the capability, then I can adjust my intend the MoD will continue to meet its recommendations to take account of where we need, commitments and within the resources allocated to as I said earlier, to adjust. it by Parliament. I want to make it clear that the costs of the equipment programme, as a whole, are under control and our planning rounds will continue Q255 Mike Gapes: Can I put it to you that the real to ensure that the equipment programme is balanced problem here—and Sir Kevin Tebbit was quite and aVordable. We are also now concluding a explicit about it, he said the Treasury asked us detailed examination of capabilities and costs across during the course of the year to reduce our planned defence, which includes defence equipment. It is level of cash spend—the reality is that it is the likely that we will need to make adjustments to our Treasury that is the big problem here and unless you spending plans to ensure we continue to live within are going to get more money, I understand that there our means. As well as looking to reduce costs a really have been increases, but if the Treasury are bearing key aim of this work will be to allow us choice and down on the Ministry of Defence and, on the other planning flexibility to ensure that we have the right hand, you have the increasing sophistication and capabilities to meet the security challenges for the cost of individual platforms, then something has to future. In that context, some of the Members, give. What gives is either the pay and conditions of Chairman, will recall what I said at this meeting in our men and women or, alternatively, the number of June last year, talking about putting into practice platforms, as you have hinted at yourself, Minister. some of the equipment capabilities that we needed as Do you think that this has got very serious a result of the SDR New Chapter. Decisions made consequences for industry because industry, if we on the outcome of all this work have yet to be taken, are having fewer platforms, are clearly going to be so I have to be cautious in what I tell the Committee, finding that there are fewer resources going in to I am afraid, but we do expect to make an procure from our own defence industries? announcement to Parliament before the summer Lt General Fulton: We have flagged up very clearly recess. Part of this is, obviously, trying to get the that capability is not a question of counting right balance of investment between platforms and platforms and we have flagged up—and Sir Peter systems, between what are sometimes described as mentioned it earlier—that an inevitable result of a quality and quantity. The world has moved on better capability within a defined resource is about appreciably. Can I just give one example before I putting the investment into what those aircraft or shut up? I am told, (and if you ask me where I got ships or tanks or vehicles are capable of doing as this from I could not give chapter and verse) that in opposed to simply counting the numbers of them. the first Gulf War it took four aircraft missions to Yes, this is a very clear change that we are seeing but take out one ground target; in the Iraq War last year, we are not alone in this, this is also being seen in the it took one aircraft mission to take out four ground United States and elsewhere. If you compare, for targets. That little story tells you the changes that example, the capability of the Type 45 destroyer with there have been in that decade between the first Gulf Sampson radar and PAAMS and compare that to a War and the second Gulf War and shows why it is Type 42 with Sea Dart, you have a massively that the new chapter talked about, perhaps, reducing increased capability. If you then network the sensors platform systems and moving towards eVect-based and invest in the networking of the sensors you capability. I have gone on long enough. increase exponentially the sea area that they can Ev 56 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton cover and the job they can do. So, self-evidently, if Lord Bach: Mr Gapes, you know as well as I do how your capability is not to rise far beyond any resource the system works across government, across you can have, the numbers of platforms and the government quite rightly the Treasury are a very numbers of ships you are going to build is going to powerful department of state because they have to come down over time. keep a watch on all of us to make sure that in their view we are spending the money appropriately. Q256 Mike Gapes: Minister, do you want to add Negotiations take place between spending anything? departments—the Ministry of Defence is a large Lord Bach: I think to the first part of your question, spending department—and the Treasury and a really, all I can say is that Sir Kevin’s words are negotiation is completed. I do not think there is with you. anything I can say here that will make the chances of Mr Hancock: Constantly. a more successful negotiation any the stronger.
Q257 Mike Gapes: Do you agree with him? Q262 Mike Gapes: I do not want to damage your Lord Bach: I always agree with the Permanent hand when you are negotiating with the Treasury— Secretary, I have found out that it is a great mistake perhaps you will not want to comment—but it is not to, particularly in public. I would say this, the clear I suspect then that certain equipment has been Secretary of State for Defence, of course, as other delayed in order to meet this requirement with secretaries of state are doing at the moment, is in regard to cash and the areas which the Treasury are negotiations with the Treasury over the settlement concerned about. for this year. Those negotiations are continuing. I do Lord Bach: Sir Peter? not think, Mr Gapes, you would expect me to say Sir Peter Spencer: The literal answer is yes. In the anything more on that. You did ask about course of last year the misunderstanding between the industry— Ministry of Defence and the Treasury about how we were going to spend certain lines of the budget was Q258 Mike Gapes: I will come back to Sir Kevin in resolved at short notice in order to rebalance the a minute if you want to talk about industry, please. books and meet our legal obligation to live within Lord Bach: Of course. As far as industry is our means. It is true to say that round the margins I concerned, it is not the diVerence, I think, between was invited to propose ways of managing some platforms being ordered or other types of defence equipment projects in consultation with General equipment being ordered that is the issue. As Fulton and his people so that we lived within our General Fulton said, although he is too polite to say means. it, frankly, size is not everything here. That is what we mean when we say that platforms are important Q263 Mike Gapes: Can you quantify how much still but are not the be all and end all of providing the that was? best capability necessarily. If we have to make Sir Peter Spencer: I think I would rather give the adjustments to defence equipment programmes then Committee a written answer. of course it follows like night follows day that there will be an eVect on industry. I have said that to both sides of industry when I have been talking to them in Q264 Mike Gapes: A written answer? the last few months. Sir Peter Spencer: Because of the commercial sensitivity. Q259 Mike Gapes: At the session that Sir Kevin gave Mike Gapes: I am sure we would be happy to receive evidence to two weeks ago he said that “the Treasury a written answer.1 asked us during the course of the year to reduce our planned level of cash spend and they did it by asking Q265 Mr Jones: Can I just follow up on that. You us to reallocate resources from the lines of our said that was last year, how many programmes have resource budget which generate cash into ones which been put to the Investment Approvals Board this do not and we did that”. Could you specify what year which have been approved first time? that means? Lord Bach: Do you understand the question? Lord Bach: If Sir Kevin did not make himself clear, Lt General Fulton: I do, I do not know the answer, I I certainly cannot. I have not read the transcript would have to check. fully—
Q260 Mike Gapes: I thought you had read all the Q266 Mr Jones: If I said it was one? transcripts. Sir Peter Spencer: I am a member of the Board so I Lord Bach: Not that one, I have to say, but if Sir can speak with some personal knowledge. If you Kevin did not make it clear then certainly I cannot begin the year from 1 April, all of the proposals that improve on what he said. have been to the Board have been decided upon.
Q261 Mike Gapes: Can I put it politely, is it right Q267 Mr Jones: That is not the answer to the that we have defence priorities, within an overall question. That is a very good Yes Minister answer; budget allocation which is not changed, determined ten out of ten. by the Treasury rather than by the Ministry of Defence? 1 Not printed Defence Procurement: Evidence Ev 57
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
Sir Peter Spencer: You are asking me oV of the top Lord Bach: Yes. of my head to remember the number. I can say it is quite a large number so I can only go away and give Q272 Mr Hancock: It is quite interesting, you you an accurate number by looking at the records. mention the fact we have not been down to your humble home for some time. When we were there Q268 Mr Jones: Your answer was trying to avoid the last, we were given quite an in-depth presentation answer to the question. You said they have been about the Smart procurement processes of the decided upon, that does not mean they have been aircraft carriers. We have been particularly approved. interested in how they are progressing. What I would Sir Peter Spencer: Because approval is not a point/ be interested to know, when do we expect an event in time it is a process, to be boringly pedantic announcement on the new arrangements to be about it, it comes to the IAB who endorse the worked out between the three partners in the carriers approval which then goes to ministers who then in considering you are one of the partners? most of the big projects, because of our delegations Lord Bach: Can I say that at the present time work, in the Treasury, need to get approval in addition as you know, is going on on the project. There are from the Chief Secretary. That does tend to take a negotiations ongoing, as you say, between the period of time so at any particular moment there will Ministry and possible partners in an alliance and be some which are at various stages of that. hopefully announcements can be made relatively soon. At the moment our proposals in relation to the Q269 Mr Jones: Could you supply us with that phases of this procurement are with the rest of figure? Government and it is hoped that we can make an Sir Peter Spencer: Yes, of course.2 announcement on that very soon indeed. As far as when an alliance strategy is set up, that might take a Q270 Chairman: You mentioned the earlier Gulf little bit longer. Sir Peter, is that right? War, when you are in negotiation with the Treasury, Sir Peter Spencer: We are having a three way Minister, perhaps you could just remind them and if conversation with BAE Systems and Thales. There you do not now, the MoD will, one of the is agreement on the large majority of the detail, there consequences of pushing equipment to the right was are one or two loose ends which we are tidying up. I seen quite brilliantly in 1982 with the Treasury’s cannot speak absolutely authoritatively on behalf of insistence that Sea Wolf was delayed—I assume on the other two parties in the negotiation but we all the grounds that the Soviet Union did not have recognise the need to get on with this. For the time surface skimming missiles, however the French being, as the Minister has said, the momentum of the did—and ships sank. Whoever is responsible for programme is sustained. There is design work going making a decision, on whether the right grounds or on out there and we are maturing the design to the wrong grounds financially, should bear in mind right level which will be needed later on. I am ultimately should that equipment not be available at concerned that we do get on and get this right but I the right time, because of the financial expediency on am concerned, also, that we have absolute clarity the part of the Treasury, then those who make that between ourselves and our main suppliers as to the decision in my view should be answerable for the principles which we are going to adopt and the way consequences. You are not talking about delaying in which we are going to do it because all of the the production of washing machines—not you evidence suggests with these sort of arrangements, personally of course—it is a question of delaying the alliance type arrangements, that one of the key issuing of weapons to the armed forces which may be things which has to be right from the outset is necessary at any time. It is a very serious decision complete agreement at the chief executive level that has to be made and I hope the Treasury realises between the consenting parties as to the principles. I that our armed forces are engaged on a fairly think it is very important that we do not try and frequent basis, that they need the equipment and fudge that and then come back with some hard luck they do not want the Treasury saying “You can have story in two years’ time that we should have got it it five years later” five years later can be five years too right. This is one of the things I am referring to when late for the armed forces, their lives may well be at I talk about de-risking the supply side. risk. Please research that more and perhaps point it out to them. Q273 Mr Hancock: Rather foolishly and probably Lord Bach: Yes. Can I say I am sure the Treasury are surprisingly, most of us thought you had already got very well aware of the point you make strongly, that in hand. Chairman. I have to say that my dealings with the Sir Peter Spencer: It is in hand. Chief Secretary, which are constant dealings, and across Government too, are ones in which the Q274 Mr Hancock: No. Treasury are helpful in terms of making sure that our Sir Peter Spencer: It is just not yet complete. equipment is procured as economically and as properly and as quickly as possible. Q275 Mr Hancock: I thought the bonhomie was there and this was clearly understood at the time Q271 Mr Hancock: If we could move on to the when BAE Systems were appointed the prime aircraft carriers now and the future of that. contractors and Thales was their junior partner in this and these arrangements had been put in place. I 2 Not printed remember well the presentation the project manager Ev 58 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton made to us saying that all of this was there. I am Sir Peter Spencer: I think it would be appropriate for surprised we are still fussing around the edges and General Fulton to lead on the requirement on this there is speculation about some major change in both in terms of the performance and the in-service those arrangements. date. Sir Peter Spencer: I hope you will be pleasantly Lt General Fulton: In terms of the performance, we surprised. I hope you will be pleasantly surprised remain where we have been all along, we have that we are taking a look at what has always been an selected the STOVL variant as that which best suits extremely well run programme and saying that in the our requirement, and that remains the case. Clearly, light of the additional information we now have if you are referring to the newspaper articles about from other programmes and in this area there are weight, we are keenly interested in that. I was over ways where we can improve upon this. That is with the company hearing what they had to say precisely what we are doing, and we are improving about it last week. They are optimistic, as one would on it to get it done better. expect them to be, about their ability at this stage of the programme to make sure that the aircraft will Q276 Mr Hancock: Do you envisage a significant perform to its specification. Clearly if it does not change in the arrangements we were talking about then we have a series of decisions that we will have previously? to take but those are decisions to be taken when we Sir Peter Spencer: In terms of contracting? get to the point at which this aircraft will not do it but at the moment with the eVort that is being expended, and the company are in no doubt as to the Q277 Mr Hancock: Yes? importance of getting the weight right, for their own Sir Peter Spencer: Yes, I do because the proposal sake, as much as for ours or the United States that we are discussing is not a traditional prime Marine Corp, then we will continue down the path contractorship, it is an alliance arrangement based we are on. upon best practice in the petrochemical industry which has served them extremely well. Q281 Mr Hancock: Were you surprised by the situation that arose? Q278 Mr Hancock: Would you suggest now that Lt General Fulton: On weight? there is going to be a much more flexible approach as to who does what and where than previously Q282 Mr Hancock: Yes? envisaged? Lt General Fulton: I am not an engineer, I am told by Sir Peter Spencer: We never had any hard those people closest to the problem, the IPT leader, arrangements in place as to who was going to do that he has been closely monitoring this all the way what and where. through and for this type of aircraft weight is a perennial problem. It is a balance between the Q279 Mr Hancock: The Secretary of State gave a weight of the aircraft, the thrust of the engine and the very strong commitment to this House that the aerodynamic drag of the aircraft so this is not a majority, if not all the work, would be done in the simple engineering problem. The IPT leader is very United Kingdom for a start. closely involved, as you would expect, from our level Sir Peter Spencer: That remains the presumption. It one participation in the programme as the only level was never definitive as to precisely where each of the one participants. bits of work would be done. There were indications in the context of ship construction, four of the Q283 Mr Hancock: If that was the case and we were locations were named as looking very promising, on top of it all along, one would assume the US and they still are looking very promising but they are Marine Corps were on top of it all the way along but not the only locations and the work is not only ship they are now envisaging the problem they are construction, there is an awful lot of system experiencing over the weight is going to delay the in- engineering work to do as well. service date of their aircraft by at least three years. Mr Hancock: There are at least two Members in the That does not lead me to believe that they were on room who have a vested interest in ensuring that the top of the problem from day one because otherwise previous arrangements will be stuck to. they would not have started with a date two years Rachel Squire: Hear! Hear! prior to where they now envisage it to be. Are you saying, General, that we were so on top of the in- Q280 Mr Hancock: I hope that is borne out by your service date for our variant of this plane it will still optimism for getting this sorted fairly quickly, Sir be on time, we will not slip? Peter. If I can then go on to what we are going to put Lt General Fulton: I am not saying that, I am saying on the aircraft carriers and the recent suggestions at the moment we do not know until the programme that the UK and US Marine Corps STOVL variant formally tells us whether they are able to solve the of the Joint Striker Fighter is going to be diYcult for problem and by when—and this is part of the de- us to manage on the carriers and what we are risking that goes on at this stage of the programme intending to do with it. The suggestion is that the as we have just discussed—and we will sign the Marine Corp are expecting now to see their in- manufacturing contract at the time at which we service date for these aircraft is going to drop by know what the proposition is, ie what the cost, what some two years or more so it will be further and the time and what the performance is. The United further back. Where are we? States Marine Corps have been very closely involved Defence Procurement: Evidence Ev 59
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton in the programme, just as close if not more closely when we first joined the programme when it was in involved in the programme as we have because its technology demonstration phase. What we are clearly it is their national programme. doing is Smart, it is Smart procurement not to commit yourself to a production buy before you Q284 Mr Hancock: It would be right to assume that know what the prices are going to be. if they are now realistically accepting that the delays will account for probably two years, we would have Q289 Mr Hancock: Sir Peter, I have read up a lot to make the same assumption? about the aircraft and its potential, we were given a Sir Peter Spencer: Not necessarily. lot of information when we were in the United States the time before last. The weight issue was not an Q285 Mr Hancock: Not necessarily. Okay. issue, it was never raised by us and certainly it has Sir Peter Spencer: Because we will ideally slipstream not been raised in any of the things I have read until them by two to three years. As the General said, we fairly recently about this aircraft. We accepted that have to make a judgment because if the programme this was the variant we wanted, it does the job, but base line for STOVL is reset then we may choose to if you are going to reduce it by the sort of weight that bring our aircraft with the same variant into service is now being suggested, the 3,300 pounds of weight, at around the same timescale. Previously it was that has to be got rid of somewhere, what does that considered to be good risk mitigation not to be do to degrade the product that we wanted? Is the amongst the early users, let somebody else sort out product then the same one? Does it have the same the problems. There is then a judgment to be made, capabilities? Does it have the same air frame when we have got the facts, as to what the trade-oVs capability to take the weight of weaponry we would are going to be. Another thing, which we will clearly expect it to have? want to look at, is that depending upon which Lord Bach: Could I say, as the General just said, it is production batch you take your aircraft from, how not a question of peeling oV the weight. There will be early on in the production lifecycle it is and how a need to tackle the weight problem in some key many of them are in the batch, it will impact on the areas and there are some good solutions to that but price. We will then go back to the person who has the we have to make sure we understand the problem. budget and say “Do you want them early at this Secondly there are options, also, to up the power of price, on time at this price or slightly later at this the engine and there are options also to improve the price?” We are at the stage where we can only aerodynamics. As General Rob said, it is not just a speculate at the moment. Meanwhile, as General question of you take all that weight away but you are Rob has said, there is an enormous concentration of right to have a concern as to what impact it has had technological expertise tackling this problem. 6.30 on the performance and we are watching that very tomorrow morning I set oV for Heathrow to fly to closely. The way in which that performance will the States for the routine meeting of chief executive reflect back into us will not really be properly oYcers where all of this problem will be laid out in understood until we have a better understanding of front of me and my American and other to what extent these three prongs of attack on the international counterparts, and including the chief problem are going to deliver a solution. executive oYcers from the major companies such as BAE Systems as well as Lockheed who are involved. Q290 Mr Hancock: That solution will have an We will then have some better understanding of impact surely on design and construction of the what progress has been made. carriers. Lord Bach: Not necessarily. Q286 Mr Hancock: If the weight problem cannot be resolved, what does that then do for the design and Q291 Mr Hancock: We were led to believe that there construction of the carriers? was a link between the way in which the carrier Lord Bach: I think we hope and expect that it will would be designed and its capability for the sort of be solved. aircraft that were going to operate on it. Lord Bach: Yes. Q287 Mr Hancock: This is not a very good example, is it, Minister, of smart procurement? Q292 Mr Hancock: If you are saying you get the Sir Peter Spencer: On the contrary, it is a fairly good aircraft down to what we originally specified it example of smart procurement. would have to be then the carrier design is as it is. I am suggesting if the variant changes does that Q288 Mr Hancock: To buy a plane where you are change the design and, if so, does that alter the date not sure about the weight. and the time of the carriers to be in-service or indeed Sir Peter Spencer: We have not yet bought the plane. for the contracts to be let? We have bought into a programme which has high Lord Bach: If I can just step back one. Originally the risks and uncertainties, has benefited from a huge concept was this would be a STOVL carrier only. amount of de-risking in the earlier phases including There was then a more fundamental appraisal taken the manufacture and competitive comparison of of the proposition that said the life of the ship is prototypes. Although it is easy for us to get likely to be considerably longer than the life of the concerned about the remaining risk, we should not aircraft and it would be imprudent right from the just ignore the huge amount which has been de- outset not to future proof-it. The fundamental risked in advance, part of which we helped to fund design concept of the carrier makes it capable of Ev 60 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton being adapted midlife if circumstances occur which Q296 Mr Hancock: If I could speedily move on to— make that a sensible proposal, relatively probably “speedily” is the wrong word to use in economically. As it happens it means that we can do relation to Typhoon—if I could move quickly on to that at any stage if there is a completely dramatic Typhoon. problem which does not get resolved but we are a Sir Peter Spencer: It is very fast. very, very long way away from that. At the moment we are looking in the context of the expectation Q297 Mr Hancock: The question I think you should being STOVL but to manage the risks as best we can. answer first of all is on the latest report that there is We will do that better when we have some a suggestion that the Eurofighter is not a very safe understanding of the actual numbers which will aircraft. It would be helpful for the record if that was come out later this month. dealt with first-oV. Lord Bach: Let me just start with that and then I will pass on. I notice that is not a story that was run on Q293 Chairman: What would be really helpful, the BBC this morning at all. I listen to the Today Minister, would be if every now and again you programme always to find out what is going on in confided in us and said “There may be problem the world and I noticed that it was not even popping up here” rather than us having to read a mentioned. newspaper and get very exercised by the information we see. If you are trying to repair relations with Q298 Chairman: In the MoD too probably. British Aerospace maybe you could include us in Lord Bach: No, the MoD have been discussing it, that process. but not the Today programme. I cannot think what Lord Bach: Can I just say on that, if we have been the reason is for that. remiss, of course we apologise. What I think might be helpful is if we send you a note on the CVF/JCA Q299 Mr Hancock: Minister, were you discussing it issue going into slightly more detail than we have before or after the report appeared in the paper? been able to here today. We will do that as a matter Lord Bach: I really do not think it is an issue that of some urgency. deserves the kind of seriousness with which the article that appeared in the Evening Standard last night pretended. The fact is that ACAS, the Q294 Chairman: We accept your invitation and Sir Assistant Chief of the Air StaV, on behalf of the Peter, tell us what is going on here. Secretary of State, decides the terms of release to Lord Bach: Can I make just one point. It went back service, standard introduction of a new aircraft type, to Mr Hancock’s original question about the CVF and he looks at the safety case. One of the elements and what I said earlier on, others have said too, that feeds into a safety case is the independent study about the crucial part the assessment phase can play that is made, in this case by QinetiQ. All new in a project and how it can save time and cost later military aircraft undergo a rigorous incremental on. It may be that CVF is a good example of that. If series of testing and evaluations to gradually expand we were to allow the assessment phase to run on for the flight parameters and increase the aircraft’s some time further in order to de-risk the project operational capability. This is absolutely standard more and to form a sensible alliance, if we were to do procedure. Operational eVectiveness is important that I can, I am afraid, see the headlines now which but, to us, safety is paramount. No country in the suggest that would mean that we were going back on world, and I think I can say this absolutely clearly, is our word as far as the in-service date is concerned. more concerned about safety and safety procedures That is not the position. We were doing that in order than the United Kingdom. As a result of the report to try to protect the in-service date, and that is really that was quoted in the Evening Standard last night, the point I am trying to get across. the Typhoon was modified, the procedures were reviewed and limitations applied to ensure that the aircraft was ready to enter RAF service and, indeed, Q295 Mr Hancock: I regard that as genuine it now has as a consequence of ACAS’s decision on commonsense. I do not that see you would get 13 March. Sir Peter? anything other than support from any of us on that. Mr Hancock: I am satisfied with that answer. Lord Bach: Getting support from you is very important but I am afraid the outside world and Q300 Mr Jones: In this morning’s Times there is a politicians, for example, who do not have the story about not being able to fly through clouds. Is advantage of sitting on this Committee might take that nonsense? This is your opportunity to knock some advantage of that. these stories on the head. Chairman: There are occasions when we get told Lord Bach: Absolutely, I agree with you. things in confidence and if that confidence is broken Sir Peter Spencer: It is an incremental process. then that privilege should not be extended further. Because we are putting greater emphasis on safety We could focus on procurement issues particularly than on performance, we are cautious. What the at this time of the year and maybe we should have a report that appears to have been leaked consisted of half session around Christmas perhaps to be alerted was an independent report on a safety case which to any problems that might come so that we are not pointed out not that there was evidence of something as shocked when bad information, or not good which was unsafe so much as insuYcient evidence to information, comes forward. be absolutely at the levels of confidence that we aim Defence Procurement: Evidence Ev 61
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton to be to be able to independently underwrite the Q305 Mr Hancock: And cost. safety performance. It is a call in some cases for more Lt General Fulton: Clearly it is a more eYcient use of data to be made available, apart from those areas resources to have fewer aircraft types that are able to where there is a specific problem as a work around fulfil more tasks than multiple aircraft types with all solution while we wait for the design modification to the support and whole life cost implications that that come through. It is absolutely right for people to be has to do the multiplicity of tasks. You would need concerned about safety. The fact of the matter is it is to look at it in terms of whole life costs and in terms the Assistant Chief of the Air StaV, who has no line of operational flexibility and the overall number of management responsibility for delivering this aircraft that you need to own. In terms of pilot project, who independently has formed that workload, JSF will also be a multi-role aircraft. The judgment on behalf of his service. That is a very good JSF and Typhoon will form the backbone of our air example of the right sort of responsible corporate power from the time they come into service for 20 governance which is necessary to look after safety years thereafter. Clearly the ergonomics of the issues. aircraft have been designed to make the pilot’s workload achievable. That is very much the future of Q301 Mr Jones: The Times this morning was wrong? the Royal Air Force, but also the Royal Navy who Sir Peter Spencer: It is an exaggeration of something will be flying JSF as well. which has moved on. Q306 Mr Hancock: What about the cost? Lt General Fulton: The overall cost? Q302 Mr Hancock: If we could move on to the enhancement of the Eurofighter and the shift of roles Q307 Mr Hancock: The cost of switching the making it from a single role aircraft to a multi-role aircraft’s functions. aircraft. We were told that these were largely Lt General Fulton: It was always intended that they software enhancements and so on. You must have would become multi-role aircraft, the question is the done some assessment of the cost of this. Is the cost point at which that becomes a priority. It will be based on all of the aircraft being changed to this role introduced first as an air defence aircraft and then or a significant number or just a few? What is the the upgrade, which was always intended, will come answer to the costs? Will this mean that there will be into play. As far as I am concerned I would like to a very big cost to the RAF in training pilots into a bring that forward so that the Royal Air Force has multi-role capacity? At the moment we have got that multi-role available to them earlier. In terms of pilots doing specific roles but this aircraft with a total cost to the programme it will not have added multi-purpose behind it means that you will have a anything to the totality but clearly it has an impact much more sophisticated training for the crews, does on the profile of it. it not? Lord Bach: I am just going to say a very brief word and then pass on to the experts. I want the Q308 Mr Hancock: Would you then suggest that we Committee to know that introduction to service is, I stick with the same number, 232, there is no point in am told, going very well. The Royal Air Force is reducing that number when you have a multi- absolutely delighted with the aircraft’s performance purpose aircraft rather than a single purpose and particularly its availability at the present time. aircraft? There has been progress here and I want to make Lord Bach: Perhaps I should just say that we are sure that the Committee know of that. absolutely committed to the first phase, tranche one, of course, and we are committed to the tranche two purchase of 89 aircraft. As far as tranche three is Q303 Mr Hancock: How many do they currently concerned, there is no need for any decision to be have? made on tranche three until at least 2007. We are Lord Bach: Six. committed to the programme.
Q304 Mr Hancock: Half a squadron? Q309 Mr Hancock: Could it be during that period of Lord Bach: I have got to be very careful. Six. time you would assess the possibility of reducing the Lt General Fulton: You are right in saying that we number of Eurofighters and buying an oV-the-shelf want it to be a multi-role aircraft, both in terms of multi-purpose aircraft? our ability to maintain the single type of aircraft and, Lt General Fulton: I think there are two parts to that therefore, the whole life cost of operating it, but also question. I do not think those two statements have in terms of operational flexibility. Multi-role aircraft to go together. I think there is an issue, as the give an operational commander much greater Minister has said, on what the totality of our flexibility either to switch between roles from one Eurofighter ownership should be. We will then have mission to another or, indeed, to switch roles within the JSF coming into service very shortly afterwards. a single mission. My objective is to make sure that Personally, I would not envisage, and it does not the aircraft that come into service henceforth do form part of my recommendation, that we need to have that multi-role capability. Clearly it was own more types of aircraft than we absolutely have originally designed as an air defence fighter and will to. It seems to me that a combination of JSF, always be a very, very high performance air defence Typhoon and the Tornado, which will continue in fighter, but the multi-role will give it the additional service until about 2020, will form the backbone of capability. You asked about pilot workload. our air power for the next 20 years. Ev 62 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton
Chairman: This is not a question, there is no time. On we do not know. One is that I have a set of the decision making regarding the Carrier performance parameters that I would like it to meet programme—I think Kevan mentioned the original and I do not know the extent to which they can all policy that was put forward about prime be matched against each other. You have raised the contractorship—it has been fairly obviously to me issue of time and also there is the issue of cost. It that the DPA want to have more control over the seems to me that this is a very good example of what programme. If they have more control over it, if they we were talking about earlier where we will have to are going to manage it, they are going to be sitting look at trades. It may well be that CDP comes back on top of the two companies, will they be expecting to me and says, “You can have something that is more risk? I would like to know that, not now but very high performing but you cannot have it until please write to us. Are they prepared to accept more 2015” or he may say to me, “You can have a limited risk? Are they satisfied that both companies are capability in 2009”, which we can then grow through prepared to accept these new arrangements? Above the life of the programme and you come to the same all, is DPA up to managing something as complex as point of trade-oVs on cost. I do not think these this because historically, and we have spent some statements are necessarily incompatible. What you time on history, I am not convinced that the heard from Mr Prest was his engineering judgment Ministry of Defence is at all any good at managing, looking at it from the industrial point of view. in essence, a programme. Please do not reply now, Clearly what I seek to get out of the assessment we would like to know the arrangements as soon as phase is the answer crucially to those trade-oV possible because we have taken an interest in this questions. project from the very outset in 1998 when it was announced in the SDR. I prefer to wait for a Q312 Mr Jones: The assessment itself is going to be response. We are almost coming to an end. Kevan, what, two years? please.3 Lord Bach: Yes.
Q313 Mr Jones: Two and a half years. You are very Q310 Mr Jones: Just before I move on to the first close then to 2009. From the customer’s point of question, you said about tranche three being until view in terms of the Army you have pressure coming 2007. Does that not create some problems in terms from Saxon and other vehicles which are 20/30 years of Eurofighter in terms of the workforce, in terms of old now and are coming to the end of their useful life. BAE Systems at Warton keeping their expertise I have asked this question before because FRES is together? not a single vehicle but a family of diVerent vehicles. Lord Bach: I do not believe it does. I think the Is what you are saying that you might have an early essential decision that is important for the workforce introduction of something that might not necessarily is the decision that we are going to build the 89 be the final one? tranche two planes. Lt General Fulton: One of the key parameters that I would like to get out of FRES is a single family of Q311 Mr Jones: That is not what they were telling vehicles which would start with the simpler variants me a few months ago when I was there. Can I move but would grow to some of the more complex on to FRES briefly. I have asked questions on this variants. This is very much the way that the United on numerous occasions and I would like to hear States are approaching their future combat system. what your answers are. Obviously you have now got In terms of our ability to support this family through to the stage where you have got a systems house life, the more commonality that there is with the evaluation. What eVect is that going to have on the vehicles, the cheaper it is going to be for the Defence timetable, the in-service date of FRES? When we Logistics Organisation to maintain it and, therefore, had the Chief Executive of Alvis before us a couple reduce our whole life cost. of months ago he said that it was unrealistic to think that the in-service date of 2009 is achievable, and Q314 Mr Jones: How do you do the trade-oV certainly on Parliamentary Questions I have asked between trying to get that right and pressures on this issue people seem to be doggedly sticking to coming from your customer, in terms of the Army, the 2009 in-service date. How realistic is this? saying “We have not got capability because we have Lord Bach: We think it is achievable otherwise we kit that is frankly running to the end of its life”? would not say it is. I think you are going to want a Lt General Fulton: Therefore, there is a very clear slightly greater definition as to what the in-service choice to be made between what I might call not- date will mean in terms of FRES. FRES and FRES. Not-FRES we could go out into Lt General Fulton: I would also say that this is an the market today and buy a light armoured vehicle, example of the point I was making to Mr Havard and there are a number on the market. earlier. I and my people set a demanding requirement but clearly the assessment phase will Q315 Mr Jones: That was my next question. inform the extent to which that is realistic. That is Lt General Fulton: But they would be the last of the why we do the assessment phase. Crucially, as far as last generation and, therefore, we would firstly not FRES is concerned, as we go into this part of the be able to grow a common family of vehicles, they assessment phase I think there are three things that would not be able to stay in service through to the sorts of timescales we need them, through to 2020/ 3 Not printed 2025, or indeed longer, therefore we would lose what Defence Procurement: Evidence Ev 63
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton to me would be some of the key performance Q318 Mr Jones: The pressure you will have on you parameters. The assessment phase needs to answer will be from the Army in terms of the capability it for me the question can we have FRES in a timescale has got now which is basically coming to the end of that is acceptable to my end customer or have we got its life. to spend money on not-FRES in the intervening Lt General Fulton: Yes. The Army are very keen to period, money that I would much rather invest in replace Saxon, CVRT and the 430 series, I do not FRES? If I can get FRES into service at a time that deny that. The question is how quickly can I solve is acceptable to the Army we can invest all of the the problem for them. money into something that will have reduced operating costs and be a much more capable vehicle, capable in terms of its operational capability, Q319 Mr Havard: This mixture question is because there are a number of technologies which absolutely crucial, is it not? It will have to be less are now maturing, and have been matured in places than 28 tonnes otherwise the new rapidly deployable like America, France and Sweden, which we would bridge is not going to take it. You have got want to incorporate into this next generation of everything from the assessment right the way vehicles. We want to be on the front of the next wave, through to the sophisticated question about the V not on the back end of the last one. electric engine as opposed to all these di erent concepts that will go in it. I was at the Joint Combined StaV College the other day and I know Q316 Mr Jones: I think you stressed earlier on, or Sir that everybody who goes there now apparently has Peter did, the importance of the assessment test, to study what FRES should look like if they come getting it right, and we would agree with that. from the Army and there is a whole rack of studies Potentially if there is going to be a gap between that are very interesting. The mixture of it is getting what you want at the in-service date, is one of important. Are there going to be engineering the options that we buy something oV-the-shelf for variants? You will have to get that mixture right, will a short period to fill that capability gap while FRES you not, and, therefore, the bases upon which you comes in? get the elements of the family are crucial to the Lt General Fulton: It is an option but from my decision making. As far as the industry is concerned, perspective it would be a very unattractive option they are going to want to know what they have got because it would divert much needed funds either to make first. Is the truth of it not that we have a from FRES or from some other programme. In political date of 2009 but that we have a practical other words, it would be a dead end capability. It industrial date of 2010/2011? would be a stopgap but it would be a dead end. Lt General Fulton: That is what we want the assessment phase to answer. There is enough work that has gone on in this country, in the United States, Q317 Mr Jones: Could FRES be a vehicle that is in Sweden and in France, to show that it is possible there now which could be adapted or is it going to be to achieve a vehicle family with in excess of 75 per a brand new concept altogether? Is there something cent commonality across all the types, which helps there at the moment that is oV-the-shelf that could with my whole life cost issue, which can then be be part of the first phase? adapted to a range of tasks, of which some variants, Lt General Fulton: Not that takes advantage of the perhaps not some of the more complex variants, can new technologies. Not that would put us at the fit in the back of a C130 because that gives me the forefront of the future development. The vehicles size and weight constraint and rapid deployability. that exist now are at the back end of the present As I said, in terms of where do we start, our aim generation. There are technologies which are at a would be to start with the simpler variants for two very advanced stage of maturity both in this reasons: one, because it is the simpler end of the country, Sweden and France. I would use hybrid market; two, because it is those APCs which the electric drive as one, which is a key defining Army needs most urgently and then we can look at characteristic, you cannot retrofit it. It is a key engineering variants, reconnaissance variants, defining characteristic, so it comes into that category cannon, non-line of sight cannon, and so on of a technology which we need to de-risk, to downstream. understand what the risks of putting it in are, because if it can go in it makes it possible to have a very capable vehicle in a very small space, because Q320 Chairman: I do not want to pursue this any one of my other parameters is for it to fit in the back further. Another point. Alvis picks up what is left of of a C130 so that it is transportable. I have a number Vickers; General Dynamics is about to acquire of these demanding, conflicting parameters and the Alvis, another British company goes abroad. Add assessment phase for me will answer how many of that then to the ones we mentioned earlier and the these conflicting parameters can I have, in what helicopter policy and you can add in all sorts of other timescale and at what cost. If that is an equation that things. Is this part of the strategy, Minister? If it is just will not work then clearly we will have to look not, you must be anxious because now virtually at what is the alternative and one of those would be every British company is under threat of either going to buy a stopgap and that would put FRES back to to the US or going to Italy or being taken over by a 2015/2020, maybe even 2025, and that is a pretty French company. That does not seem to me to be unattractive prospect to me. very smart defence industrial policy. It might look Ev 64 Defence Procurement: Evidence
25 May 2004 Lord Bach, Sir Peter Spencer and Lieutenant General Rob Fulton smart in Washington, it might look smart in Rome, Lord Bach: Thank you for your support, thank you and it certainly looks smart in Paris, but from where for your help on that. A few years ago Thales, for I am sitting it does not look smart at all. example, would have been considered nothing more Lord Bach: Of course it is a concern. I would not be than just a French company putting its toe in the telling the truth if I said the general point you make British market. It now happens to have the second was not a concern. I have to repeat, Chairman, these largest number of UK workers in any defence companies that are owned abroad and invest heavily company in this country and there are exports from in the United Kingdom and create and sustain jobs the UK that are UK exports. I understand here, sustain and create technology here, as far as we absolutely, if I may say so, Chairman, where you are are concerned, and this must be commonsense in the coming from on this. I would not be telling you the global defence market, are to be treated as British truth if I said there was not an anxiety about it. This companies. is a consolidation of the defence industry worldwide Mr Jones: A good example is Saab Bofors on the that is not finished yet. I would say on the other side NLAW contract. that there are British companies by the old definition who are investing themselves, and have to a large extent, in the United States and in Europe too. This is the global defence industry. Whatever our worries may be about it, I am afraid we have to live with it to some extent. Q321 Mr Havard: Where does General Dynamics sit Chairman: It seems to be all of our companies are as far as the Bowman radio is concerned? That was going abroad. Anyway, I will draw stumps before I a rhetorical question. get really mad. Thank you very much. Defence Procurement: Evidence Ev 65 Written evidence
Asterisks in the written evidence denote that part or all of a document has not been reported with the agreement of the Committee.
Memorandum by the Defence Procurement Agency
When I appeared before the Committee last May we discussed the recent performance of the Defence Procurement Agency (DPA) and I gave you some early thoughts on how I hoped to take the Agency forward. I mentioned my intention to undertake a review of how the Agency operates and its progress in implementing the Smart Acquisition programme. This work is now complete and I thought the Committee might welcome a note on the changes I intend to implement to improve the output, management and performance of the DPA.
In my early months as Chief of Defence Procurement I consulted widely with industry, other Government Departments and within MoD to identify areas of business that were working well and aspects that needed further development. I also commissioned McKinsey & Co. to undertake an analysis in order to gain an independent assessment of where improvements were needed. A remarkable degree of consensus emerged from these separate analyses. It is clear that the Smart Acquisition agenda is the right one and that we have already delivered major benefits through successful implementation of many key strands of that change programme. But much more needs to be done in certain areas. We have therefore constructed a programme of initiatives that will deliver further benefits by re-energising the SMART Acquisition reforms. The strong emphasis within the DPA will be the Executive Board’s performance management and Corporate Governance. Much will be achieved by internal changes but only close collaboration with the rest of the Department and Industry will enable us to raise our level of performance. I have the strongest support from Ministers and my Defence Management Board colleagues. Indeed complementary changes are planned by CDL and we have invested considerable personal attention to enhancing joint working to the benefit of the Front Line Commanders and to the tax payer. Within the DPA I am implementing substantial changes to our key processes. Central to this will be greater senior level review of the progress of projects and the introduction of a more rigorously applied process to gain assurance that project performance, time and cost estimates, and underpinning assumptions, are robust. We also intend to strengthen our relationship with our industrial suppliers. A new system of Key Supplier Management will enable us to take a more strategic, Departmental wide approach to relations with major suppliers, reflecting Industry best practice and consistent with the Government’s Defence Industrial Policy. We also have developed proposals that will strengthen our financial management and the alignment of business practices between the DPA and the Defence Logistics Organisation. These changes will be supported by adjustments to our organisational structure to provide a better focus on the delivery of projects and on the management of financial, commercial and technical issues. These changes will enable me and my senior staV to better ensure delivery of our project output.
A specific area we discussed last May was the skills and career development of those who work in the DPA. We are in the early stages of a major change to our personnel practices, which will improve how we identify and structure personal development opportunities. We intend to develop a more detailed picture of the skills currently available to us, and the skills we will need in the future. We are bringing together a number of senior staV who lead in particular functional areas, such as finance and commercial management, to help in designing and providing development opportunities for staV to increase their skill levels and ensure they are equipped for the challenges of the future.
I see these changes as urgent but essentially evolutionary as they build on the changes made under Smart Acquisition which were, and are still, entirely right for the defence acquisition. Nonetheless they represent a substantial change programme, and we will take care to ensure they are implemented eVectively. The aim of the change programme is to take us to the level of performance that we fully recognise we have to achieve. I intend to have the principal changes in the DPA in place by 1 April. If you or the Committee have questions on this work, I would be happy to address them at a suitable opportunity and you will of course always be very welcome to come and see the new regime in operation at Abbey Wood. Ev 66 Defence Procurement: Evidence
A Stocktake of Smart Acquisition in the DPA
THE AGREED WAY FORWARD
Foreword by CDP This paper sets out the decisions that my Executive Board colleagues and I have now taken in order to improve the overall performance of the Agency. It covers changes we will be making to our key business processes, better ways of developing our people and adjustments to our organisational structure. It follows the “Green Paper” on the outline conclusions from my stocktake of Smart Acquisition in the DPA, which I issued to all Agency staV, via team and group leaders, last Autumn. This is a substantial change programme; the largest since the formation of the Agency. It will build on the successes that have gone before and also respond vigorously to the challenge of addressing areas of weakness. The programme is being taken forward in parallel with work to transform and restructure the DLO. CDL and I will take this opportunity to converge management practice in the two organisations. The ECC and other key stakeholders in the Department are also fully supporting this work; a Ministerial Group, chaired by Minister (Defence Procurement) has been established to tackle issues we cannot address on our own. My message is simple. The Agency has developed well in its first five years. But it can and must do better. We can only do this by working closely with our key stakeholders; especially with the ECC, DLO and Front Line Commands, and with Industry. Please read this paper, and then engage positively with the work ahead. My aim remains to have the principal DPA changes in place by 1 April this year. Peter Spencer 15 January 2004
Introduction We are making the changes set out in this paper because we believe there is clear evidence of the pressing need to improve the output, management and performance of the DPA. Our conclusions have been formed by work conducted over the past eight months. This has included analysis by McKinsey, consultation both within and outside the Agency, consideration of the responses to the proposals set out in September’s Green Paper, detailed work on these proposals and a series of Executive Board (XB) discussions on the way forward. This paper does not repeat the background to the changes that can be found in previously issued documents. Nor does it provide a step-by-step guide to the new processes, improved means for developing our people and their skillsets and the organisational changes that we now plan to implement. This is set out in more detailed papers, available via the Stocktake website, that have served to inform our thinking. These will be further developed in the next few months as we learn lessons from the pilot phase. This paper does however oVer an overview of what will be diVerent, and why, so that we can work together to implement the changes to our best advantage. We have the opportunity now to raise our game, and that of our suppliers, so that we are able to meet the promises we make to our customers. This is a key goal for the future development of the Agency. We plan to develop this theme as part of a published Strategic Framework, which we will issue by mid-April and will set the context for the introduction of our new ways of working.
Project Review and Assurance The Green Paper identified the need for a more consistent, comprehensive and challenging approach to internal project review. It also set out our intention to establish a more rigorous assurance process. This will: — build confidence in our ability to deliver successful outcomes; — serve to ensure that we make full use of our collective knowledge and experience; — provide a clear focus for collaborative working between IPTs and the specialists in our Support Groups that will help us deliver projects that are more eVectively integrated and to agreed Performance, Time and Cost targets; — provide a clear framework for the Corporate Governance of the Agency, by reducing the tendency to operate as 90-plus “independent” organisations; — provide an insight on supplier performance that will complement Key Supplier Management activities; — enable resources to be directed to where they are most needed; — ensure all proposals going forward from the Agency are robust and realistic; Defence Procurement: Evidence Ev 67
— provide our customers and partners with a more reliable basis for constructing forward plans and making investment decisions. The Project Review and Assurance process will be an integral part of—and will operate eVectively alongside—wider Departmental processes, most notably the Approvals process and Assurance mechanisms. It will comprise three key elements: — regular Project Performance Reviews (PPRs) between the IPT Leader (IPTL) and the relevant Operations Director (or Deputy Operations Director); — peer/independent project review; and — formal assurance at key stages of the project life cycle. The PPR will build on concurrent good practice where teams critically examine their own project progress and seek feedback on the way forward. But we aim to introduce a standardised approach across the Agency which, while recognising that the level of detail needs to be appropriate to the size, complexity and criticality of the project, can be consistently applied to all projects. This is important if we are to be successful in making it easier to work with others to understand quickly the root cause of issues impacting on project delivery. Otherwise we risk compromising our ability to see and understand issues as we look across the broad portfolio of projects we manage. We will therefore introduce a common set of Key Performance Indicators and Assurance Criteria that can be used to demonstrate that good project management practice is being applied. These are being developed to reflect best practice at Initial and Main Gate, and beyond. They will cover areas such as: — leadership and people management; — risk management; — technical maturity; — through life management maturity; — project integration; — safety management; — supplier capacity, capability and performance; — procurement strategy and commercial arrangements; — financial control and management; — cost of ownership.
Project Performance Review. How will it work? PPRs will: — be led by the Operations Directors (or their Deputies), involving appropriate stakeholders, such as Customer 1, industry, and the DLO; — take place regularly, typically every three months; — focus on successful project delivery, including supplier performance; — involve functional leads as appropriate, based on an assessment of project risk and the level of assurance achieved in each functional area; — cover a portfolio of projects, if for example a cluster IPT is being reviewed; — provide a direct input to Corporate Performance Management.
How will PPRs diVer from current Quarterly Reviews? — PPRs will provide a more systematic and forensic examination of performance informed by constant and assured data including on risk management. — IPTLs will be encouraged to identify the actions that the XB needs to take in support of project delivery and will receive better quality feedback on issues and ideas for moving forward.
Transferring knowledge and spreading good practice The PPRs will provide a mechanism that Operations Directors (and their Deputies) can use to introduce new techniques that will help us to develop our approach to project management across the Agency. Priorities for the coming year, as set out in the Green Paper, include: — closer engagement of Customer 2; — increased trade-oVs between Performance, Time and Cost; — improved through life management; Ev 68 Defence Procurement: Evidence
—moreeVective contracting strategies; — increased and better targeted investment in early risk reduction; — improved arrangements for technology management and “pull-through” of new technology; — development, and increased usage, of the Acquisition Management System; — revisions to the process for initiating projects. We have set in train a number of workstreams to implement key recommendations in each of these areas. In support of PPRs, we will further develop the system of Peer Reviews that is already good practice in some areas. These should be initiated by the IPTL. Their size, scope and frequency will vary according to the nature of the project. We will also make much greater use of independent reviews, including wider use of OYce Government Commerce Gateway reviews, co-ordinated across equipment acquisition by PDG. In addition to regular PPRs and Peer/independent review, we will introduce a formal assurance process to confirm that submissions are suYciently robust before they are presented outside the DPA. At key stages of the project life cycle, in particular when a project is initiated and before seeking Initial or Main Gate, IPTLs will be expected to seek explicit assurance that the project has reached an acceptable level of maturity. They should invite members of the XB including Functional Directors, together with members of the Joint Capabilities Board and the DLO Management Board as appropriate, to take part in a comprehensive examination of the key issues. This event will comprise the XB’s formal endorsement that the project is ready to proceed, and will be formally recorded as such in the Board’s records.
Roles and responsibilities IPTLs will be: — responsible for delivering their projects to the agreed performance, time and cost parameters; — accountable for the data and underpinning evidence they present; — responsible for seeking constructive feedback and for securing assurance, as appropriate, from the relevant Support Groups and other specialist areas. Functional Directors and Support Groups Leaders will be: — accountable for the quality of the assurance they provide to IPTs; — responsible for providing IPTs with constructive advice, and for helping to foster a climate of innovation and acceptable risk taking. Operations Directors and Deputy Operations Directors, supported by Directors Commercial, will be: — accountable for the thorough application of the project review and Assurance process and for the quality of the feedback they provide; — accountable for the overall assessment of individual project health they provide to the XB; — responsible for delivering an integrated and coherent output from across the projects within their clusters; — responsible for providing advice on the redistribution of resources between BLBs to where they are most needed. In introducing a new approach to project review and assurance, we do not wish to undermine an IPTLs authority and accountability for delivering project outputs. This remains at the heart of the Smart Acquisition philosophy and is central to how we want to operate. We must however recognise and exploit the role that the XB has to play in supporting IPTs, in delivering an overall Agency output that is integrated and coherent and in prioritising the deployment of internal resources across our portfolio of projects.
Project Reporting We will introduce a new approach to performance measurement. This will standardise the way in which project data, primarily Performance, Time and Cost estimates, latest status against plan, milestones and associated financial information, is presented across the Agency. In doing this we will introduce measures to indicate whether a project is on track, rather than relying solely on latest predictions of final project outturn, which can be many years away. The emphasis will be on variation in 50% confidence estimates (rather than breaches in approvals). This will help us collectively to detect project management and financial problems before they become critical. The Agency’s overall targets will be set on the same basis. Our new approach will provide the means for collating individual project perspectives to provide valuable information at the IPTL, Operations Director/Deputy Operations Director and XB levels. In refreshing our approach, we intend to underpin 10%, 50% and 90% confidence estimates with perspectives on project time and cost based on “success” and “quantified and costed risk” as discrete elements. IPTLs will be expected Defence Procurement: Evidence Ev 69
to own the data on their projects and personally to endorse key project data each month. They will be expected to ensure that an appropriate audit trail is maintained to enable internal and external validation, as appropriate, to confirm performance on their projects and of the Agency as a whole.
Agency Key Targets Our Key Targets currently focus on too narrow a section of the DPA’s business. With eVect from 1 April 2004 measurement of DPA performance will change. We intend: — to broaden the targets beyond Major Project Report (MPR) projects to include all post-Main Gate, pre-In Service Date, Cat A to C projects; — to measure actual in-year variation of project forecasts, comparing 50% forecasts at the end of the year with those at the start of the year; and — to introduce new means of measuring our eYciency and a focus on asset delivery. The Performance Management process will draw on and feed into the Project Review and Assurance processes, and will be better integrated with financial and other sources of performance data. Our internal monitoring will also place greater emphasis on: — short term indicators of longer term success, eg Anchor Milestones and maturity scores; and — early stages of project lifecycle.
Financial Management Better financial management is a key enabler to improving the performance of the Agency. Finance must be an integral part of project management within all teams/groups if we are to improve the timeliness and accuracy of financial information and, with it, our level of financial control. This will require an increase in financial skills, not just for finance staV but also for IPTLs and project managers. Improvements to process are also needed if we are to improve financial management, and also increase coherence with the DLO; this is our current priority for the DPA/DLO Joint Working programme. We will clearly articulate the accountabilities and responsibilities of all staV who are involved in finance and ensure that staV are held to these responsibilities consistently. To reflect the full range of financial management responsibilities, Senior Finance OYcers will be replaced by Financial Controllers. Their position will be strengthened so that it properly reflects the pivotal role they fulfil in IPTs and Support Groups. We believe they should be senior experienced qualified accountants, or at least possess equivalent competence. They will be a key advisor to the team/group leader and be part of the IPT or Support Group Management Board. While IPTLs and Support Group Leaders will be responsible for making Financial Controller appointments, the Finance Director will expect to be consulted, and will assist in finding suitable candidates. We recognise that this represents an ambitious programme of change in the way that we conduct our financial business. We need to be realistic abou the pace of implementation, which will need to take account of current resources and skill levels. A key component will be processes to support the training and development of all staV so that they can fill these posts and progress through the organisation. This will involve much more proactive career management to ensure people are well fitted to meet the demands of the roles we expect them to fulfil.
Role of Financial Controller Reporting directly to the IPTL/Support Group Leader, principal accountabilities and responsibilities on the IPTL’s/Support Group Leader’s and the Finance Director’s behalf include: — management of BLB finances; —eYcient and eVective management, integrity of, and application of financial processes, procedures and systems; — accuracy, completeness and integrity of BLB accounts; — supporting the objectives of the IPT/Support Group and informing decision making; — scrutiny and approval of expenditure proposals; — engaging as appropriate with industry on financial matters. As part of the Project Review and Assurance process, Operations Directors (and their Deputies) will carry out robust scrutiny of IPT finances. To assist them they will be supported by a small team of experienced staV, linked to the Finance Director, who will form the nucleus of a newly created Business Analysis capability. Business Analysts will be responsible for analysing financial and other corporate management information, particularly in preparation for approval submissions, highlighting issues and anomalies to IPTs/Support Groups, Operations Directors and Deputy Operations Directors, and assisting IPTs/Support Ev 70 Defence Procurement: Evidence
Groups in resolving these. Further independent assurance about IPT, Support Group and Agency financial management will be sought through an enhanced Compliance Audit Team as well as audits undertaken by DIA and the NAO.
Key Supplier Management Central to improving our performance is the need to improve our knowledge and understanding of the supplier base. We will continue to do this through engagement and relationship management with major suppliers. This will be co-ordinated across the Department through the adoption of a common approach, known as Key Supplier Management (KSM). There are a number of reasons for this approach. Supplier management across multiple contracts can bring tangible benefits through the exercise of greater market power and the ability to introduce more consistent behaviour on both sides of the relationship. Furthermore, the Department’s relationships with its key suppliers are becoming increasingly complex, which makes each key relationship more important but harder to manage. The key measures we will introduce are: — a set of common roles, processes and terminology, so that diVerent parts of the Department can act together; — the development of a Key Supplier Representative role, where the senior-level leadership for the relationship with each supplier will be provided by two-star personnel from each of the DPA and DLO; — Key Supplier Engagement Manager (KSEM) posts (located in the DPA/DLO dual accountable SRG) to provide a single focus for day-to-day supplier management; — Prime Key Suppliers will be assigned a KSEM, who will act as the focal point for all supplier management, working to ensure that the MoD understands the supplier. Joint ECC/DPA/DLO one-day, two-star workshops are being held in January to agree the aims, objectives, purpose and modus operandi of KSM.
Change in the Equipment Programme Currently we do not do enough to understand the full impact of Equipment Plan (EP) programming measures on DPA business. We will therefore establish the means for assessing how changes agreed in each budgeting round aVect our business, including: — the impact on the size, shape and direction of the Agency; — future requirements for skills, expertise and knowledge in the Agency and elsewhere in the Acquisition community; — the potential of the industrial supply side to deliver the planned programme. We will establish a capability to draw together inputs from across the IPT community and lead Support Groups, notably FBG, SRG and CFPG, that will serve to provide advice to the XB on the key issues. The XB will use this information as a primary consideration in its business planning.
Joint Working with the DLO It is clear that we and the DLO are still not working together as eVectively as we should. Nor are we taking suYcient account of through life management issues. Until we change this, we cannot manage projects on a whole life basis, which is critical if we are to minimise the costs of equipment acquisition, including in- service support. Unless explicitly agreed otherwise, all IPTs will in future be dual accountable to both the DPA and DLO for how they deliver key outputs. This will serve to focus management attention on creating eYciencies in DPA/DLO business and on the development of common and consistent philosophy, business processes and systems. Our aim is to ensure that the two organisations operate seamlessly at points of contact. We will ensure that procedures and processes are common unless there is a good reason not to do so. In support of this, we have agreed with the DLO the key principles that will increasingly govern the way business is conducted across the two organisations. These principles will be a key enabler in easing the transition and management of projects through the CADMID cycle and in improving our joint approach to Through Life Management.
DPA/DLO Dual Accountability principles — authority should be delegated to IPTs via a “joint package” that comprises the delegation from CDP alongside the delegation from the DLO. Defence Procurement: Evidence Ev 71
— IPT staV should have senior personnel from both the DPA and the DLO in their reporting chains who should jointly agree individual personal objectives where appropriate. All ILS Managers, for example, should have their IPTL, as First Reporting OYcer and a senior DLO member as Second Reporting OYcer. — PPRs should be conducted jointly by representatives from both the DPA and the DLO to a common agreed format. — the DPA and DLO Boards should review Performance Management data that has been drawn together by a single common process and common supporting toolsets. — IPTs will be required to look beyond their own host organisation for expert advice, eg from a DPA Support Group, or a DLO Head of Specialisation or DDSA, where this oVers the most appropriate source of assistance.
People and Skills If the process improvements we propose are to work eVectively, we need to build on the capability of our people. Currently we do not have a suYciently detailed picture of the skills that the Agency needs in the future. Nor do we have suYcient understanding of the developing skills that we have available to us. We need both, and need to take steps to bridge any skills gap that may arise. We will therefore introduce a workforce planning process that gathers information at Corporate level to ensure the Agency has suitable, qualified and experienced people now and in the future. We believe there should also be a more even balance between managed moves to meet the needs of the Agency, and the “free-market” approach characterised by the JOB system. This will not reduce the current right of individuals to move between jobs, which we accept is at the heart of the Departmental personnel management system. But we will look to oVer individual moves that will be in the business as well as the individual’s interests. This work will be undertaken by collaboration between line managers, individuals and the Personnel Group. To help both initiatives, a network of functional Development Partners is being established from the start of this year.
Development Partners Development Partners will comprise senior staV who lead in their respective professional field and can work with Personnel Group to help develop the right approach to workforce planning, skill development and identifying further personal development opportunities across the Agency. We will establish a comprehensive network of Development Partners, who will play a key role in: — helping us to draw up the specifications for the people skills we require to deliver our business; — identifying future changes in skill requirements; — developing our approach to staV coaching and mentoring. We have formed an initial cadre of Development Partners, which will take forward this initiative with immediate eVect. The initiative will give greater visibility to career paths that should allow individuals to achieve their full potential. While focusing on the development of skills in key functional areas, we also wish to see staV from outside particular functions developing a suYcient degree of knowledge to be able to appreciate the requirements of other specialisms. We expect, for example, project managers to understand commercial issues. We believe that those appointed to leadership posts should possess the skills needed to handle the issues of political significance that we are faced with everyday, and that everyone in the Agency should have at least a basic understanding of how our finances are managed.
Proposed Measures
Project Management — development of a personal development guide for Project Managers, to be completed by March 2004; — subscriptions to the Association of Project Management will be paid, in addition to other relevant professional subscriptions.
Finance — increased use of exchanges with the DLO; — development of a Financial Training Needs Analysis (TNA), and the further development of training requirements identified through the TNA. Ev 72 Defence Procurement: Evidence
Commercial — introduction of three new Commercial Mentoring posts at B1 level; one in each Operations Director area; — increased emphasis on continuous professional development.
Technology — study to be commissioned to identify need for detailed technical expertise within DPA. Once complete further work will be pursued to consider how to meet those needs; — increased use of exchanges with Dstl.
Secretariat — provide opportunities for short-term postings in London to help develop secretarial skills and facilitate wider awareness; — establish a secretariat “community of interest”; — mentoring and guidance for secretariat staV. In addition to improving the way in which we develop people skills, we also need to improve the mechanisms available to us for the reward and recognition of personal achievement. The DPA operates a range of monetary and non-monetary measures for the reward and recognition of its staV. This includes the operation of the performance-related bonus scheme for civil servants in Band B–E, introduced across the MoD in 2002. Widescale consultation is taking place on options for future remuneration arrangements that will more closely meet the business needs of the Agency.
Organisation The Green Paper set out a proposal for adjusting our organisational structure in support of plans to increase performance, strengthen Corporate Governance, improve key business processes, and make better use of our collective skills, knowledge and experience. In making these adjustments we shall: — ensure clear accountability for performance at team/group leader and XB levels; — enhance our ability to deliver a coherent output from projects; — increase our focus on certain projects that are of special importance; — increase eYciency by optimising our use and deployment of available resources; — support the establishment of common and more robust business processes, particularly in the key areas of finance, supplier, technology, risk and through life management. The Green Paper introduced the idea of creating clearer accountability at XB level for, on the one hand, the delivery of integrated and coherent project outputs and, on the other, for growing and sustaining the functional expertise, processes and tools that support project delivery. It proposed: — the creation of three Operations and three Functional (finance, commercial, technical) Board posts in place of the six Executive Director (XD) positions; — the creation of six Deputy Operations Directors to support oversight of project activity. We have confirmed this reconstitution of the XB, and will re-title the former XDs as “Directors” with descriptive titles. We believe the changes will enable the Board to focus more clearly on the delivery of our promises to our customers. It will be accompanied by the deletion or delegation of a number of the “cross- cutting” responsibilities that the XDs currently have. Examples of this are international relations, which will now be managed by IRG, and relations with some of our smaller key suppliers, which will be co-ordinated by SRG. The Green Paper also identified actions to review arrangements for clustering IPTs and for brigading Support Groups. On the basis of this work, we have decided to establish the new organisational structure shown in the figure below (Annex A provides greater detail) from 1 April this year. IPTs led at one-star level, together with others in the cluster led at Band B (or military equivalent) level that manage projects of particular importance to our business, will have the appropriate Operations Director as their First Reporting OYcer. The First Reporting OYcer for other IPTs in the cluster will be the appropriate Deputy Operations Director. Work will be undertaken to identify optimum Countersigning OYcer arrangements for DPA leaders. This will consider each post on a case-by-case basis, and will include options both within the DPA (eg DCE, Operations or Functional Directors) and outside the DPA (eg DLO). We believe that the new structure oVers the best fit for today’s business needs. It is however designed to be inherently flexible and we will keep it under review, reacting to changes in circumstances. The overall clustering plot will be formally reviewed by the XB each year; further changes should be expected as our business develops. Defence Procurement: Evidence Ev 73
Board options continue to evolve. The presence of a Non-Executive Director (NXD) on the Board has made a major contribution to our thinking and the recent agreement that DCDL should attend DPA board meetings (with DCE also attending the DLO equivalent) has significantly helped ensure that the two organisations continue to develop closer working relationships. We intend to build on that success by recruiting a second NXD, who will have a track record in successful major project delivery and change management, to provide us with further external challenge to our thinking. The organisational changes at Board level will accompany a more structured approach to business planning and corporate risk management to capture our activity across the Agency. This will build on a number of initiatives that have already been put in place over the past few months. They include the functional approach to the DPA Business Plan introduced last year, which was widely welcomed. We have reviewed and agreed a supporting set of comprehensive delivery plans for each area of our business, which will enable us better to identify the costs of what we do, and assess the priorities for investment accordingly.
Chief of Defence Procurement
Non-Exec Director Deputy Chief Executive Non-Exec Director
Director Director Director Finance Commercial Technical Air, Weapons & Support Information Superiority Land & Maritime Director Director Director
Weapons Air Support Sys Info Sys Comms Net Land Sys Maritime Cluster Cluster Cluster Cluster Cluster Cluster Cluster
IPTs with 2-star IPTs with 2-star IPTs with 2-star IPTs with 2-star IPTs with 2-star IPTs with 2-star IPTs with 2-star Finance Commercial Technical Operations Operations Operations Operations Operations Operations Operations Support Support Support Director Director Director Director Director Director Director Groups Groups Groups as 1st RO as 1st RO as 1st RO as 1st RO as 1st RO as 1st RO as 1st RO
Deputy Director Deputy Director Deputy Director Deputy Director Deputy Director Deputy Director Weapons Air & Support Info Sys Comms Net Land Sys Maritime
IPTs with 1-star IPTs with 1-star IPTs with 1-star IPTs with 1-star IPTs with 1-star IPTs with 1-star IPTs with 1-star Deputy Deputy Deputy Deputy Deputy Deputy Deputy Operations Operations Operations Operations Operations Operations Operations Director Director Director Director Director Director Director as 1st RO as 1st RO as 1st RO as 1st RO as 1st RO as 1st RO as 1st RO
Central Support Groups DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs
Director Commercial Director Commercial Director Commercial Air, Weapons & Support Information Superiority Land & Maritime
IPTs will be clustered on the basis of a clear business case for such groupings to recognise principal business relationships between IPTs and to identify and exploit possible opportunity benefits. We recognise that there is no single basis for clustering that would meet all the business needs of any IPT. We have therefore agreed that we should adopt a construct based on a range of factors that takes account of the current challenge of Network Enabled Capability (NEC), key relationships with Customer 1, Customer 2, the DLO and links with the industrial sector. We will also encourage the establishment of “communities of interest” to help teams tackle specific issues outwith cluster boundaries and to ensure that IPT clusters do not create business “stovepipes”.
How will Clusters Operate? IPT clusters, convened by the appropriate Deputy Operations Director, will provide a forum for: — reviewing performance across a portfolio of projects; — commissioning in-house Peer Reviews of project business; — sharing knowledge (including the short-term loan of resources) to tackle issues identified within specific teams and/or across the cluster. A critical element of our new approach will be the introduction of measures that incentivise performance across the cluster. Support Groups will similarly be grouped by business relationship under the three Functional Directors and DCE. Each will take responsibility for reviewing whether the organisation of the Support Group resources for which they are responsible should be further restructured. We have positioned the Integration Authority (IA) under the Director (Information Superiority) in recognition of its close relationship to the work of the IPTs in the IS and Communications IPT clusters. But further work will be undertaken to ensure Ev 74 Defence Procurement: Evidence
proper visibility of the IA’s important assurance role and links with DCSA. We have also agreed with the DLO that we should look to create single sources of functional expertise, from the current DPA Support Groups and DLO Heads of Specialisation communities, that will be used consistently across both organisations.
Increasing Agency performance Leaders in the DPA will be measured not only on the basis of the business they manage directly but also on their contribution to overall Agency performance. We plan accordingly to introduce group targets for each IPT cluster, against which the performance of the relevant Operations Directors, Deputy Operations Directors, Directors Commercial, Business Analysts and all IPTs therein would in part be assessed. We also believe that there would be benefit in having the flexibility to incentivise the performance of specific IPTs within a cluster, or in diVerent clusters via a “community of interest” if, say, between them they could optimise industrial performance or deliver some trade-oV. The measures we use will be kept under review to ensure they serve to embed the right behaviours into our ways of working. This approach would be mirrored by equivalent arrangements for Support Groups. We will also establish more robust performance reviews for Support Groups, including customer feedback, in line with the introduction of PPRs for IPTs. Resourcing of Support Groups will increasingly be driven by customer demand. As part of the annual staV reporting system, we will invite DPA leaders to present evidence of their contribution to the broader goals of the Agency. Examples could include active involvement in ALDS, mentoring, contributions to Learning From Experience and the loan of resources and expertise to tackle specific issues in other teams/groups.
Creating the Deputy Operations Director posts The Deputy Operations Director posts will be crucial to our ability as an organisation to ensure an integrated and coherent output from our project population. These key posts need to be filled by experienced acquisition professionals, who are able to work closely with IPTs, their Operations Director and the Board as a whole. To ensure that we get the best individuals available, the six posts will be filled through competition. In developing our plans to establish these posts, we have reviewed how best to undertake the tasks of our current Support Directorates in future. This work has confirmed the requirement for current skill sets. Finance expertise will be repositioned partly within IPTs to help meet the requirement for increased skills within our teams and partly within CFPG. Other, non-financial roles currently performed by the Support Directorates will be assumed by the new Deputy Operations Directors. Our aim is to embed better secretariat skills within teams/groups. IPTLs, in particular, will be expected to have the ability to see a wider perspective to present a case coherently and to be sensitive to political issues. But, as an interim measure, additional support will be provided to IPTs through the establishment of a small number of Band B or C secretariat posts within the complement of each Operations Director.
Wider Issues We made clear in the Green Paper that much of what we hope to achieve we cannot do alone. There is a clear need to work with the wider Department to ensure external constraints do not handicap us in our attempts to deliver improved Agency performance. In response to this need a Ministerial Group has been established to provide a forum to ensure that these wider issues are given the priority they need. One such issue is the need to ensure resources are not diverted away from projects in their early stages in order to manage Defence Programme issues year-on-year. The group has agreed that suYcient funding for risk-reduction should be included and that the protection of these funds should be highlighted in papers for Ministers on the STP/EP. The Group is also considering work by DGSA, on behalf of the Investment Approvals Board (IAB), to review and propose improvements to the Approvals process. Key to this is the need to refocus Initial Gate, so it operates as intended in the original Smart Acquisition design—a low hurdle to identify and select a range of options for evaluation during the Assessment phase. The Ministerial group will also consider the use of Senior Responsible Owners (SROs), which are being piloted on the Carrier-Strike capability. These aim to provide a single focus, with clear authority to account for progress in delivering Capability across all Lines of Development, and provide assurance at any time to the IAB. The SRO role draws on best practice guidance by the OGC and aims to further strengthen through- life thnking and the assurance regime. Further, we aim to set in hand work with the ECC to improve the maturity of capability definition expressed in EP Operations, the process whereby Options are raised and costed and new business taken on by the Agency. We will explore opportunities for better alignment between the allocation of EP resources and the incremental nature of the approvals secured at Initial and Main Gate. Defence Procurement: Evidence Ev 75
Implementation
The change programme will be led and overseen by the XB in accordance with the Implementation Plan that can be found on the Stocktake website. Some changes can be made quickly, but we expect others will take up to 12 months to embed fully. The success of our work will be assessed against the success measures set out at Annex B.
We will start to pilot some of the changes with immediate eVect. This will involve a selection of IPTs and Support Groups, and will be supported and facilitated by appropriate staV including, in some cases, DGSA. For example: — PDG will work with the Operations and Functional Directors to identify suitable candidates to pilot the new Project Review and Assurance processes. — SRG’s workshops on the way forward for KSM have already commenced. — PG has started work to establish a network of Development Partners.
We plan to establish the new organisational structure on 1 April this year. There will be a transition period, spanning 1 April, for new appointments and familiarisation. Some involvement of individual Directors with individual IPTs and Support Groups will begin now, but formal responsibilities will not change until April, and collective XB responsibility will continue. We will convene a series of launch events in March/April for each of the seven IPT clusters and the new functional pillars. These will serve to explain further the key changes that are required and how they will work in practice. Further internal consultancy support will be available on request from individual teams/groups.
Key milestones
Key milestones include: — Baseline current performance against Stocktake Success measures by mid-February. — Agree detailed design of new processes, based on outcome of piloting work, by mid-March. — New organisation and staV reporting arrangements in place by 1 April. — Issue Strategic Framework by mid-April.
Chief of Defence Procurement
Non-Exec Director Deputy Chief Executive Non-Exec Director
Director Director Director Finance Commercial Technical Air, Weapons & Support Information Superiority Land & Maritime Director Director Director
•CFPG •CSG •ALTG Weapons Air Support Sys Info Sys Comms Net Land Sys Maritime •IPRG •CNNRP Cluster Cluster Cluster Cluster Cluster Cluster Cluster •LA Comm •D Flying •PFG •DOSG •SRG •DQAG •DTEG FAWS CM(PA) A400M CM(BM) JBTSE CM(BM) CSIS CM(IS) BLD CM(IS) Mobility C)M(BM) ASM CM(PA •FBG AH CM(BM) UKMFTS CM(BM) IA CM(IS) FRES CM(BM) CVF CM(PA) FOAS CM(PA) TUAV CM(IS) GBAD CM(BM) JCA CM(PA) •ISG FSTA CM(BM) SAT CM(IS) NP CM(PA) •PDG Nimrod MR4A CM(PA) NW •STG SABR CM(BM) T45 CM(PA) Typhoon CM(BM)
Deputy Director Deputy Director Deputy Director Deputy Director Deputy Director Deputy Director Weapons Air & Support Info Sys Comms Net Land Sys Maritime
ASRAAM CM(BM) C-17 CM(BM) ATS CM(PA) ASTOR CM(IS) CMSG CM(IS) CA CM(BM) FSC CM(PA) Brimstone CM(PA) BFI CM(BM) ACCS CM(IS) CASS CM(IS) DCC CM(BM) JCTS CM(BM) •DPA Sec •FMG •IRG •PG BVRAM CM(BM) FsAST CM(BM) IMAGE CM(IS) MAC CM(IS) ETS CM(BM) LPDR CM(BM) CASOM CM(PA) MCME CM(PA) JES CM(IS) SPCISR CM(BM) EVP CM(BM) LSDA CM(BM) IRCM CM(BM) NBC CM(BM) NEW CM(PA) SPSCM CM(BM) GSV CM(BM) MARS CM(BM) IGW CM(BM) Sonar 2087 CM(PA) STRS CM(IS) MRAV CM(BM) NSRS CM(PA) PGB CM(PA) SIFF CM(BM) TFCS CM(IS) SUV CM(BM) SV CM(PA) Torp CM(PA) SANS CM(BM) TCM CM(PA) These Groups report to DCE (FMG via DPA Sec) TDL CM(IS) SSK UKCEC CM(PA) KEY KEY Comms/electronics Comms/electronics Land sys/vehicles Land sys/vehicles DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs DLO-hosted IPTs Weapons Weapons Shipbuilding Shipbuilding Aircraft Director Commercial Director Commercial Director Commercial Aircraft Air, Weapons & Support Information Superiority Land & Maritime CM Capability Manager CM Capability Manager Ev 76 Defence Procurement: Evidence
Stocktake Outline Success Measures
(Note: These measures are subject to further work, which will be completed by mid-February)
Improved Agency Performance
Performance: Percentage achievement of Key User Requirements. Time: Average in year time variation (based on 50% confidence estimate) of post-MG pre-ISD Cat A–C projects. Percentage of Anchor milestones achieved in year, on or ahead of the 50% confidence estimate. Cost: Average in year cost variation (based on 50% confidence estimate) of post-MG pre-ISD Cat A–C projects. Delivery: Value of assets delivered in year as a percentage of planned deliveries (Asset Delivery Schedule).
Improved People Management — Match of people skills to requirements. — Reward and Recognition measures appropriately linked to Agency Performance Management.
Improve Business Processes — Improved financial management. — Percentage of staV satisfaction with LFE mechanisms. — Percentage of staV satisfaction with the Acquisition Management System (AMS).
Improve Project Maturity at MG — TRLs—Average Technology Readiness level of CAT A–C projects at MG. — TLM—Average Through Life Management maturity of Cat A–C projects at MG. — Risk—Average Project Risk Management maturity of Cat A–C projects at MG. — Time taken for Approving Authority to agree decision after submission of the MG business case by the Customer and the IPT. — Supplier assurance at MG.
Improve Organisational Effectiveness — Percentage of Support Group operating resources accounted for by customer forecasts of demand through the Support Group Tasking and Resourcing process. — Percentage perception among DPA leaders that DPA XB is eVective in supporting the IPTs and programme delivery. — Percentage perception among DPA leaders that DPA Peer Groups are eVective in supporting the IPTs and programme delivery. — Percentage perception among DPA leaders that IPTs and Support Groups work in a collaborative manner. January 2004 Defence Procurement: Evidence Ev 77
Memorandum by the Ministry of Defence
DEFENCE INDUSTRIAL POLICY
1. Summary In November 2003, the Government published a review of its implementation of Defence Industrial Policy, with the active support of the Defence Industries Council (DIC). The review showed that some good progress in implementing the Policy has been made. The way forward has been agreed with the DIC and the Department continues to strengthen its relationship with industry; we are now seeking to develop further the practical application of the Policy. The Department will publish a further review around the end of this year. We are continuing to make progress in the following main areas:
2. Assessment of Wider Defence Industrial Policy Factors in Equipment Investment Decisions Acquisition decisions throughout 2003 have been taken within the framework of the Policy. However, given the long-term nature of acquisition, it will take time for the full eVects of the Policy to be seen. Specific training has been provided to ensure that the need to take account of wider industrial factors at an early stage is recognised. It is also mandatory for all business cases for projects with an acquisition cost of £20 million and above to include an assessment of the wider industrial issues, engaging relevant government stakeholders where appropriate.
3. Relationships with Industry A major eVort is being made to develop more eVective relationships with the Department’s most important suppliers that will enable us to take a more strategic approach to relations with industry across our acquisition organisations. The aim is to develop a mutual understanding of strategic priorities, and to identify and address impediments to improved business performance. The Department has taken concrete steps to enhance key supplier management, and these actions are being pursued as an important element of broader acquisition initiatives, most notably the Defence Procurement Agency “Stocktake”’ on Smart Acquisition and the Defence Logistics Organisation Procurement Reform programme.1
4. Market Access The Department continues to press for greater eYciency in the operation of the European defence market and in the acquisition of military equipment through collaborative programmes. We are contributing to the European Defence Agency, which will focus on military capabilities; we are pressing for timely implementation of the Letter of Intent Framework Agreement; and we continue to influence the operation of the Organisation for Joint Armament Co-operation (OCCAR). Building on the US/UK Declaration of Principles, the Department has set up, in conjunction with the US Department of Defense, a bilateral forum at senior oYcial level with the aim of increasing the eVectiveness of defence acquisition co-operation. As a result of the first meeting of this bilateral forum in February, a number of working groups have been established to address specific issues. The Defence Export and Market Access Forum has met on three occasions under MoD Defence Exports Services Organisation (DESO) Chairmanship and with the active involvement of the Department of Trade and Industry (DTI) and the DIC. April 2004
Further memorandum by the Ministry of Defence
DEVELOPMENTS IN SMART ACQUISITION
1. How the Recommendations from the Defence Procurement Agency (DPA) Stocktake are being Taken Forward. (a) The conclusions in our January “White Paper” will be implemented over the next 12–18 months. The work programme is being driven by a small dedicated project team and Minister (Defence Procurement) chairs regular meetings of a senior group to review progress on wider Departmental aspects of the reforms. Changes are being made across all aspects of DPA business, but the heart of the programme is a series of key process changes. These include:
1 Further detail is contained in the Memorandum on “Developments in Smart Acquisition”. Ev 78 Defence Procurement: Evidence
(b) Managing and Developing our People. We need an improved workforce planning process to better manage the skills and career development of DPA staV. This has a number of elements: — Assessing current skills levels across the Agency, and identifying gaps between this and what we will need in the future. — The establishment of a network of senior staV representing key professional areas to improve training and development activities for staV. — Increasing professional competence, eg, through staV accreditation to professional bodies such as the Association of Project Managers. — More interchanges with other parts of MoD, Government and industry. — Improved training and mentoring arrangements in areas such as key engineering specialists and finance and commercial management. (c) Performance Management. This is a major area for improvement. It includes a number of strands: — An enhanced project review process has been implemented across the Agency. This is more rigorous, evidenced-based approach led at senior level and involving both the MoD customer and other stakeholders. It enables us more clearly to focus on delivery and more eVectively to challenge underpinning assumptions. The process will help expose risks and provide assurance that project estimates are robust and realistic, that best practice is being consistently applied and that the project’s overall management is sound. — The introduction of a system of Peer Reviews based on the OYce of Government Commerce Gateway review model. This has already been successfully applied on two projects and is now being targeted at all Category A and B projects.2 These Reviews will be conducted on a non- advocate basis and will provide objective advice to project leaders at key stages of a project’s life. — A new set of Agency Key Targets has been agreed by Minister (DP) to better reflect our goal of eVective delivery. These will be formally announced to Parliament shortly. The critical measures of time and cost forecast will in future be based on variation against “expected” (50% confidence) estimates, rather than approved levels (currently set at 90% confidence). This provides a belier focus on the need to meet our promises to the customer. New targets will measure the eYciency of the Agency and our performance against forecast deliveries. — We have introduced a new Corporate Management Information System, to provide more consistent monitoring of project performance. We will further develop this over the next year. Our analytical ability will be enhanced through a team of Business Analysts, now being recruited, who will help us assess Integrated Project Team (IPT) performance and identify trends across projects. (d) Financial Management. We are appointing Financial Controllers at Management Board level in major IPTs to provide strategic financial advice to IPT Leaders. Initial appointments have been made in the T45 and Nimrod MRA4 IPTs, and further appointments will be made over the next year. (e) Commercial and Supplier Development. New guidance on more eVective contracting strategies will be published within the next few months, following consultation with the defence industry. We envisage that this guidance will: — Propose improvements to current practice, for example a renewed emphasis on the use of the Target Cost Incentive Fee pricing model. — Introduce new policies such as a phased approach to contracting in Assessment and Demonstration, requiring demonstrated achievement of Technology or System Readiness Levels, or other measures of project maturity, before proceeding contractually to successive phases. To develop further our relationship with suppliers, we have appointed senior level focal points for all Departmental business with our 18 primary key suppliers. These senior staV will: — Chair a series of regular strategic review meetings with these suppliers to help develop mutual understanding and pursue common objectives. — Help ensure that the Department and wider Government present a more consistent message to industry. Meetings have already been held with BAE Systems and Alvis. Meetings with other primary key suppliers will take place over the next year. (f) DPA/Defence Logistics Organisation (DLO) Joint Working. We have: — For the first time issued common finance reporting templates and instructions for in-year financial management, and joint instructions for planning to staV in both organisations. — Agreed a joint approach to financial skills development and further improvements to the coherence of financial reporting and processing.
2 Category A projects are those where the Procurement Cost exceeds £400 million. For Category B projects the Procurement Cost is between £100 and £400 million. Defence Procurement: Evidence Ev 79
— Begun the process of issuing a joint package of delegations from the Chief of Defence Procurement and the Chief of Defence Logistics to DPA and DLO IPTs Leaders. This provides an enhanced focus on the accountability of IPT Leaders to the heads of both organisations. — Agreed to improve coherence between the two organisations by reviewing our support structures with a view to establishing, by April 2006, a single set of enabling services across defence acquisition. We already have, for example, a single group to provide advice on supplier relations issues. (g) Organisation. A new DPA organisational structure was established on 1 April 2004 to underpin these changes. This will strengthen the DPA’s Corporate Governance and enable the DPA Board to integrate better programme and risk at Agency level. Key elements are: — Three DPA Executive Board members appointed as Operations Directors to focus exclusively on the delivery of a coherent and better integrated output from projects. The Operations Directors will oversee project work and provide greater management challenge and support to project leaders. — Three DPA Executive Board members appointed as Functional Directors to develop key processes, ensure their consistent application and improve professional standards in finance, commercial and technical areas. — The clustering of IPTs into groupings that reflect the major business relationships between projects. — The appointment to the DPA Board of a second Non-Executive Director, to provide additional external challenge and complement the many benefits that we have obtained from the contribution of our current Non-Executive Director, Professor Tom McGuVog. Recruitment is currently underway.
2. The Improvements in Procurement Performance that are Expected These changes are designed to improve the DPA’s ability to deliver military equipment capability to agreed performance, cost and time parameters. We expect therefore to be able to measure the impact of the reforms through year on year improvement in results against the DPA’s Key Targets. We will also use a suite of internal measures to assess our success in implementing the key enablers to improving corporate performance. These include measures developed by the National Audit OYce as part of its annual Major Projects Report, such as consumption of risk diVerential.
3. Other Developments in Defence Procurement/Acquisition The development of Smart Acquisition across the Department continues, with a focus on improving equipment capability and reducing whole-life costs and timescales. The role of the Equipment Capability Customer (ECC) is being further strengthened fully to ensure eVective co-ordination and integration across the various Lines of Development3 that contribute to military capability. We intend to embed the concept of “single-point accountability” in the ECC over the next few months, developing ideas from the OYce of Government Commerce. This will provide added authority to ensure coherent, timely delivery across the Lines of Development and on a through-life management and whole-life cost basis. Development of our approach is being informed by current experience following the appointment of the Senior Responsible Owner overseeing work on the CVF-Strike capability. The DLO is also implementing a programme of Procurement Reform as part of its wider change programme of delivering eYciencies in key logistics processes. Its aim is to develop an integrated and co- ordinated procurement function for the DLO that will maximise value for money from the DLO’s procurement expenditure, covering goods and services bought by the DLO both for its own consumption in support of delivering outputs and for consumption by Front Line Commands. Many of the contracts delivered by the DLO will be available for use by other parts of the MoD and other Departments, and we are looking for opportunities to extend elements of this reform agenda beyond the DLO. The Procurement Reform programme is underpinned by the creation of teams responsible for Category Management and Key Supplier Management. These will be staVed by professional procurement personnel with specialist knowledge of the requirements and suppliers for particular product areas. They will be responsible for delivering lower-cost procurement through development of best practice procurement strategies, better supplier management and developing the skills of DLO teams. As well as improved, consistent processes and better skilled staV, increasing use of procurement tools such as e-auctions, e-catalogues and e-tendering will also increase competitiveness and secure better value for money.
3 The Lines of Development are Concepts & Doctrine, Equipment, Force Structure, Manpower, Training, and Sustainability (including Infrastructure). Ev 80 Defence Procurement: Evidence
As part of the Department’s work to broaden Smart Acquisition, from 2004–05, the appropriate application of Smart Acquisition principles to non-equipment acquisition within Commands will be a mandatory condition of the delegation of authority to top-level budget holders, linked to their Service Delivery Agreements with MoD Head OYce. Initially the focus will be to increase their capabilities in this area to improve confidence in their projects being delivered to performance, time and cost. The overall programme of acquisition covered by the Broadening Smart Acquisition initiative amounts to some £2.5 billion. April 2004
Further memorandum by the Ministry of Defence
DEFENCE PROCUREMENT The following key milestones have been achieved in these projects since last year’s exercise: — Achievement of the BOWMAN In-Service Date ahead of schedule, in March 2004. — Selection of the AirTanker consortium as the Preferred Bidder for FSTA. — Signature of the Development and Production contract for A400M. — Start of manufacture on HMS Daring, the First of Class Type 45 destroyer. — Signature of amended contracts reflecting the Agreements between MOD and BAE SYSTEMS on Nimrod and ASTUTE. — Delivery of the first Eurofighter Typhoon and acceptance by the RAF. — Approval for FRES to go forward to the Assessment Phase. The cost and time data in the memoranda reflect the latest estimates as at 31 March 2004, rather than— as in previous years—the endorsed Equipment Plan allocation. This data is therefore still subject to Departmental review and action through the current planning round.
1. A400M
Project Summary 1. The A400M military transport aircraft is being acquired to replace the remaining C-i 30K Hercules aircraft fleet. The Secretary of State announced at the launch of the A400M collaborative programme on 16 May 2000 the Department’s intention to order 25 A400M aircraft to meet our long-term outsize airlift requirements from the latter part of the decade. Main Gate approval was achieved in May 2000. 2. A single-phase Development and Production contract for 180 A400M aircraft was signed by the European armaments agency OCCAR (on behalf of the Participating Nations) and Airbus Military (AM) on 27 May 2003. National oVtakes are as follows: Germany 60 France 50 Spain 27 UK 25 Turkey 10 Belgium 8 (including one on behalf of Luxembourg).
3. Inter-Governmental Arrangements (IGAs) were signed in May 2003 and comprise: (a) a Memorandum of Understanding (MoU) committing the nations to the programme; (b) an OCCAR Board of Supervisors (BoS) Decision that agrees to the assignment of the A400M Programme to OCCAR; (c) a Programme Board Decision (PBD) setting out the management arrangements.
Policy Context and Capability Requirement 4. The StaV Requirement (SR(A)435) to replace the C-130K Hercules aircraft was endorsed in 1993. In July 1997, the UK announced its intention to rejoin the collaborative European Future Large Aircraft (FLA) programme (as A400M was then called). The associated European StaV Requirement (ESR) matches and in some areas exceeds SR(A)435. It specifies a larger cargo-carrying volume, a greater maximum payload, and a higher cruise speed. 5. The Strategic Defence Review (SDR) confirmed the need to replace the capability provided by the 0-130K and concluded that an outsize airlift capability was required to support the deployment of the Joint Rapid Reaction Force (JRRF). SDR New Chapter also came to this conclusion. Defence Procurement: Evidence Ev 81
6. The A400M will provide tactical and strategic airlift capability to all three Services in peace, crises and war. The aircraft will enter service with significantly more capability than the C-130K, and will achieve an intermediate tactical clearance of day/night, poor weather/hostile environment capability by 2011. Full clearance is due in 2015.
Costs 7. Expenditure to 31 March 2004 is £38 million. *** The exact contract price is commercially sensitive, however our commitment in the Memorandum of Understanding earmarks some ƒ3 billion.
In-Service Date (ISD) and Service Life 8. The current forecast UK A400M ISD is 2011 (at 50% confidence) and is defined as “Entry into service of the 7th aircraft with Strategic Military Aircraft Release and support arrangements”. 9. The approved ISD at Main Gate was 2009 (at 90% confidence). The ISD slippage is the result of the delay in bringing the contract into eVect caused by delayed approvals in Germany. Since contract launch, there has been no further ISD slippage. 10. The A400M will have an In-Service life of 30 years. First UK aircraft delivery is scheduled for 2010. Last UK aircraft delivery is scheduled for 2015.
Acquisition Approach 11. On 4 September 1997, the seven-nation FLA Request for Proposals (RFP) was issued to Airbus for an aircraft which met the ESR. This was followed, on 29 July 1998, by the issue of a four-nation competitive UK-led (FR, BE & SP also joined) Future Transport Aircraft RFP to Airbus (FLA), Boeing (C-17) and Lockheed Martin (C-i 30J). 12. On the basis of the proposals received, the European A400M was chosen. In selecting A400M, the greater industrial benefits to the UK and technical compliance were taken into account. The UK, Belgium, France, Germany, Italy, Spain and Turkey announced on 27 July 2000 (the Farnborough Declaration) that they intended to procure numbers of A400M aircraft suYcient to launch the programme. 13. The IGAs and contract were signed in May 2003 following German Bundestag approval. 14. The collaborative procurement approach has enabled nations to acquire a capability that otherwise would have been unaVordable individually. The commercial approach is bringing proven Airbus best practice, from civil aircraft development and production, to the programme. The single-phase approach circumvents the potential delay evident in collaborative programmes needing production approval. In respect of aircraft certification, the intention is to adopt an approach based on civil Joint Airworthiness Requirements, supplemented by military requirements where necessary. 15. Management of this programme is being undertaken by OCCAR. The A400M Programme Committee (consisting of senior oYcials from each participating nation) has direction and oversight of the programme. 16. No specific options are being considered at this stage for long-term development. Improvements to avionics and other systems will be required over the life of the aircraft to maintain and/or enhance capability.
Industrial Issues 17. The strategy for A400M has been to adopt a “commercial approach” whereby the emphasis is on the prime contractor to secure a cost-eVective solution that meets our requirements. The A400M contract is for the design, development, production and delivery of the complete aircraft, including its engines and all other systems. 18. The contract does not prescribe any national workshare arrangements. AM is free to select its suppliers on grounds of performance, time and cost, therefore ensuring that best value for money is obtained. Consequently, there are no impediments to UK companies securing sub-contract business. It is estimated that the A400M programme will create up to 8,000 jobs in the UK of which 2,500 will be long- term skilled in the aerospace sector (notably in design and advanced engineering). 19. A key element of Airbus’ successful record in meeting challenging delivery timescales is their system of centres of excellence. As a result, Airbus UK has become the Airbus centre of excellence for wing design. The key location will be Filton where Airbus UK will not only exercise overall management of the wing and its design, but also the entire assembly, full equipping and delivery of wings to the aircraft final assembly line in Seville. Ev 82 Defence Procurement: Evidence
20. In May 2003 AM selected the European TP400-D6 engine oVered by Euro Prop International, a Special Purpose Vehicle comprising Rolls Royce, SNECMA, MTU and ITP. This was followed, in July 2003, by the selection of Ratier-Figeac for the propeller, and, in February 2004, by the selection of Messier- Dowty for the Landing Gear System. 2004 is a key year for selection of remaining A400M equipments and systems. 21. AM believes that there is a significant market for the A400M beyond the Participating Nations. AM estimates of the scale of this market vary, but could be around 200 aircraft. Australia, Malaysia, Norway, South Africa and Sweden appear the most likely early export targets for AM.
In-Service Support 22. There is a wide range of In-Service options from which to choose. Airbus Military has made its own proposals that can be tailored according to the national level of contractor support required, while other service providers may also be able to oVer competitive support options, especially when considering PFI solutions. It is anticipated that RAF personnel will provide forward support at RAF Brize Norton, while extensive use will be made of contracted services to provide depth support. This strategy will ensure flexible and responsive support to operations, while making best use of industry experience and resources for the conduct of the more specialised and resource-intensive tasks. Opportunities for common support, including training, are being actively investigated and any operational or cost benefits will be considered in finalising the UK support options. 23. The A400M IPT is now also working towards compliance with the guiding principles of the Support Solutions Envelope (SSE), a tool developed by the DLO to ensure that the support options selected by DPA IPTs consider the implications for support through-life, thereby facilitating programme transfer from DPA to DLO.
Next Steps 24. The A400M 95-month Development phase is achieving contractual milestones. Airbus Military declared that End of Concept Phase was reached at end 2003 and the programme is now in Pre-Design Phase which will be followed by Detailed Design later this year. 25. 2004 will be a key year for the selection of equipment and systems. Industrial Partners have been allocated development activities and are working satisfactorily. 26. Airbus Military is expected to submit its application for Type Certification by April 2005. Work for the Final Assembly Line site at Seville, Spain, has started and is scheduled to be ready to receive jigs and fixtures for the A400M production line by end 2005. First flight is programmed for December 2007 with Type Validation following in July 2009.
2. ADVANCED SHORT RANGE AIR-TO-AIR MISSILE (ASRAAM)
Project Summary 1. The Advanced Short Range Air-to-Air Missile (ASRAAM) is a highly agile, passively guided advanced air weapon, manufactured by MBDA. It is being deployed on Tornado F3 to replace the Sidewinder AIM-9L missile and it will also be fitted to Typhoon and Joint Strike Fighter. ASRAAM entered service at an interim standard in January 2002 and became available for operational deployment in summer 2002. A series of incremental improvements will lead to a full operational capability by late 2004. 2. Since the last HCDC survey, MBDA have delivered the second, and most probably the final, software increment, which has been accepted: work has begun to integrate this standard onto Tornado F3. A cost benefit analysis on a third possible increment will be made later this year. 3. The total number of missiles is confidential, but will be supplied if required.
In-Service Date (ISD) and Service Life 4. The ISD definition was the acceptance of the Certificate of Design and performance statement, with the subsequent delivery of 60 missiles fit for purpose. This was achieved at an interim standard in January 2002. 5. ASRAAM entered service 37 months late against the Main Gate approval. The reasons for this slippage were due to missile hardware and software technical diYculties (!18 months), alignment of missile production deliveries with candidate aircraft (!6 months) and failure of the contractor to meet contractual performance (!13 months). 6. The previous system on Tornado F3, AIM9, was judged to provide suYcient capability for the period prior to the introduction of ASRAAM. The eVect of the delay was somewhat ameliorated by delays to the introduction to service of the primary platform, Typhoon. Defence Procurement: Evidence Ev 83
7. The minimum proven life required for ASRAAM at entry to service was 10 years, and the design was to be such that further life extensions would not be precluded. This has been met. This life will need to be extended by way of In Service Surveillance, Life Extension Trials, Whole Life Assessment initiatives and periodic replacement of pyrotechnics in order to match the Service life of Typhoon and JSF. 8. The assumed Out-of-Service date is 2043.
System Performance 9. ASRAAM met 6 out of 10 Key User Requirements (KURS) at ISD. The narrowly missed KURs covered target acquisition and tracking, lethality in key engagement conditions and performance against countermeasures. 10. A clear and robust route map towards achieving the missile’s full operational capability, and the remaining four KURs, was agreed with the contractor, and endorsed by the Investment Approvals Board (IAB), prior to the acceptance of ISD missiles. 11. In December 2003, the IPT accepted “FOC2” standard software which met all the requirements agreed for this performance increment, as well as delivering MBDA’s obligations for final (FOC3) performance levels for two of the outstanding four KURs. While performance fell marginally short of the most demanding levels set for the third outstanding KUR, the Department also accepted at this stage that MBDA have maximised the performance available from the current design, and that this KUR had therefore been met. The company has exceeded the requirements of the fourth KUR as endorsed by the IAB in December 2001. Any further performance improvement in this area will be a value for money decision that the Department plans to make later in the year, following a report by the company; this work would be beyond the scope of the current approval. 12. The RAF is delighted with ASRAAM’s outstanding performance. It is the world’s best short range air-to-air missile and gives our pilots a critical edge in achieving air superiority. It was deployed on OP TELIC and showed very high levels of on-aircraft reliability in an adverse environment, although no missiles were fired. 13. ASRAAM has been bought by Australia. We continue to work in partnership with the Australians on a programme of through-life development. The programme aims primarily to ensure that the required service life is achieved and could involve the acquisition of emerging technology on an incremental basis.
Costs 14. Expenditure to 31 March 2004 is £798 million. The current forecast cost is £873 million compared with £866 million approved at Main Gate; an increase of £7 million. The variation since the last HCDC report is an increase of £16 million. This was due to having to replace funding taken out of the programme in a previous planning round on the assumption that—although already under contract—we would be able to reduce the number of missiles we would procure. In the event, the Department was unsuccessful in re- negotiating a contract amendment.
Acquisition Issues 15. There are no plans to procure follow on buys of ASRAAM. If further countermeasures improvements are required to achieve an FOC3 standard this will be a new requirement, for which additional funding and a new approval will be needed.
In-Service Support 16. ASRAAM is supported through a five-year contract with MBDA, let in March 2003, based on contracting for availability. Responsibility for the project will transfer to the Defence Logistics Organisation (DLO) at the end of 2004. 17. The DLO plan to combine ASRAAM with other systems from MBDA in a partnering arrangement that will ensure that the full benefits of rationalisation and flexibility between programmes are realised.
3. LIGHT FORCES ANTI-TANK GUIDED WEAPON SYSTEM (LF ATGWS)
Project Summary 1. The LF ATGWS requirement is for a lightweight, man portable medium range anti-tank guided weapon to equip the Light Forces within the Joint Rapid Reaction Force and Mechanised Infantry. It will be met by the US Javelin system produced by the Raytheon/Lockheed Martin Joint Venture. In terms of key milestones over the last 12 months, final design modifications to the UK weapon system were completed in January 2004. Ev 84 Defence Procurement: Evidence
Policy Context and Capability Requirement 2. The Strategic Defence Review (SDR) confirmed the need for an anti-armour capability. This was reinforced in SDR New Chapter and the 2003 Defence White Paper, which emphasised the role of highly mobile expeditionary forces. Despite the world-wide reduction in tank inventories since the end of the Cold War, nations against which UK forces might be deployed have generally maintained their numbers and several states are actively trying to acquire new tanks with increased capabilities. Accordingly, the armoured threat remains. The more modern Main Battle Tanks not only have increased capabilities, they also have more capable armour and are more diYcult to destroy. The requirement for eVective anti-armour systems was reinforced by experience in Operation TELIC. 3. Operational analysis has demonstrated the need to equip the dismounted soldier with a medium-range man portable weapon that can be used against armour and secondary targets in an oVensive and defensive role. Javelin will replace the ageing MILAN system and be eVective against all ground vehicles including modern and future battle tanks from all aspects. EVective range will be out to 2.5km. 4. The procurement of a Military OV-The-Shelf solution from the US will enable increased interoperability with a number of other nations. 5. The quantities of Javelin being acquired for the Light Forces and Mechanised Infantry are in the order of 350 Command Launch Units and ****. 6. All Key User Requirements for the Javelin system are forecast to be met.
Costs 7. Expenditure to 31 March 2004 on the LF ATGW is £56 million. 8. The current forecast cost of the Demonstration and Manufacture Phase of the programme (at 50% confidence) is £318 million, compared with the cost (90% confidence) approved at Main Gate of £345 million.
In-Service Date (ISD) and Service Life 9. The planned In-Service Date is November 2005 (at 50% confidence). The ISD (90%) approved at Main Gate is August 2006. ISD is defined as a brigade trained and equipped. 10. The planned Out-of-Service Date for Javelin is 2025.
Acquisition Approach 11. The Javelin system is being procured in accordance with the principles of SMART Acquisition. This included, for example, the trading oV of some lower priority requirements in favour of increased programme aVordability. In addition, competitive pressures during the Assessment Phase resulted in significant cost savings and improved procurement terms. 12. Following LF ATGWS Main Gate approval (January 2003), the contract for Demonstration and Manufacture was placed (February 2003) for procurement of the Javelin missiles and training systems from the Raytheon/Lockheed Martin Joint Venture. This contract is combined with a US Foreign Military Sales (FMS) case which will supply the Command Launch Units (CLU) and the first five years support of the equipment. It also includes fixed price options for a further three five year support periods, providing opportunities for equipment support through life. The combination of Direct Commercial Sale and FMS represents a pioneering approach that brings together the benefits of both processes. 13. Javelin was selected following a competition with the Israeli Spike system oVered by a joint venture between MBDA and Rafael. The competitive pressures resulted in significant cost savings and improved procurement terms. 14. The Javelin Memorandum of Understanding with the US allows for future upgrades to the system, in co-operation with the US, should these be required. Javelin is designed to permit easy upgrade; the software required to operate the missiles is held within the Command Launch Units and any software upgrades that are developed can be easily distributed and rapidly deployed to the missiles on launch. 15. There are some UK specific modifications to the CLU including provision of a tripod. However, buying the Javelin system essentially oV the shelf will ensure highly capable performance is delivered in the shortest possible time and preventing a significant capability gap developing once MILAN is phased out (the option of acquiring further MILAN weapons had previously been discounted as not cost eVective). The close working relationships that have been established with industry, using Smart methodology, will simplify problem resolution throughout the acquisition process. 16. As a consequence of the oV-the-shelf acquisition strategy, the possibilities for collaboration are limited. However, several allied nations including Canada, Australia and Norway have selected Javelin and we are in the process of identifying areas where co-operation would be of mutual benefit. Defence Procurement: Evidence Ev 85
17. Training will principally be conducted by simulation with only very limited live training firings being undertaken. This approach has been facilitated by rapid advances in simulation technology and has the benefit that the number of training missiles we need to procure can be reduced.
Industrial Issues 18. The JAVELIN joint venture has established a team of UK industrial partners including BAE Systems, INSYS, Woven Electronics, Leafield Group Ltd and Thales Optics and has committed to delivering 100% UK industrial participation. 19. There is likely to be significant world-wide demand for weapons of this type over the coming years. If Javelin is successful at meeting these demands there is potential for UK industry to provide sub- components for these and potential US Government procurements.
In-Service Support 20. The system has a simple In Service Support strategy. The missiles are maintenance-free through life, apart from routine surveillance of the stockpile. Other than very basic repair, the Command Launch Units and Training Systems will be maintained at a contractor-run permanent UK repair facility.
Next Steps 21. The next major milestone for the Javelin system will be its entry into UK service, which is planned for November 2005.
4. WAH 64 ATTACK HELICOPTER
Project Summary 1. The Apache WAH 64 is an attack helicopter, based on the American AH64D. It is optimised for its long range anti tank capability. WAH 64 will replace the Lynx / TOW (Tube launched, Optically Tracked, Wire guided missile) combination previously used by the Army to attack armoured vehicles and point targets. WAH 64 is seen as a quantum leap forward in capability, mainly due to the surveillance and target acquisition capability of the sensor suite and its significant increase in lethality and survivability compared to previous systems. The WAH 64 Apache will facilitate the introduction of an entirely new Air Manoeuvre doctrine and a new Joint Rapid Reaction capability. Army tactics and formations will change as a result, and the three Air Assault Regiments of 16 Brigade are each being restructured around two x Apache Squadrons (total 16 Aircraft) and one Lynx Utility Squadron (12 Aircraft). 2. The WAH 64 prime contract with Westland Helicopters Limited (WHL) for 67 aircraft (including certification and qualification of the complete weapons system), support equipment and particular spares, has a value of £2.2 billion. The warstock munitions contract with Insys Limited (formerly Huntings Engineering Limited) was worth £350 million. 3. Key Milestones achieved in the last year include delivery of the first aircraft to arrive at Dishforth on 8 June 2003, Military Aircraft Release 6a clearance (which accepted the embodiment of several elements of Helicopter Integrated Defensive Aids Suite (HIDAS) and an additional software release into the aircraft, vital steps towards Initial Operational Capability, IOC), was achieved on 15 December 2003. 656 Squadron Army Air Corps completed conversion-to-type training on 20 February 2004. Ship Operating Limit Trials on HMS Ocean were completed successfully on 30 March 2004.
In-Service Date (ISD) and Service Life 4. The approved ISD—based on the delivery of nine aircraft—at Main Gate was December 1999. However, this was subsequently revised to December 2000 as a result of decisions to fit Rolls Royce engines and to ensure that Departmental resources matched the programme requirements. ISD was achieved on 6 January 2001. Problems were experienced with the delivery of the Training Service, with the resulting lack of trained pilots leading to a delay in Apache being fielded. This issue was addressed in the NAO Report Building on Air Manoeuvre Capability: The Introduction of the Apache Helicopter published in October 2002. A key recommendation of the report was that the Department should manage across the six lines of development. Apache has fully incorporated this recommendation into its business practices and, as a result, the programme is now on track to meet the revised Operational Milestones set by the Air Manoeuvre Policy Group (AMPG) of IOC (four AH and two Lynx for peace time operations) in August 2004 and Lead Aviation Task Force availability (the first Apache Regiment) in February 2005. The platform is on target to meet all its KURs, since ISD. The final aircraft is expected to be delivered in early summer 2004. The aircraft is planned to remain in service until 2030. Ev 86 Defence Procurement: Evidence
System Performance 5. At the time WAH64 was procured, no Attack Helicopter that met fully the Department’s essential requirements was available oV the shelf. An incremental acquisition approach was adopted to deliver this shortfall in capability. The first 36 aircraft were built to an initial, baseline standard and are being retrofitted with the HIDAS, secure communications, Helicopter Usage Monitoring system, Low Height Warning System and Collective Training System. The final retrofitted aircraft is expected to be delivered in Apr 2005. There were technical problems with the HIDAS but MOD has agreed a revised, incremental delivery programme with the contractor. This safeguards the key project milestones set out above, which are being adhered to. 6. Apache has secure data transmission facilities and we have allocated resources to ensure compatibility with future communications systems such as BOWMAN. Additional funding is being sought for full secure voice communications; at IOC, Apache will have the capability for secure voice communications with UK ground troops equipped with “NATO Applique” Bowman radios.
Costs 7. Expenditure on the Attack Helicopter Platform and Munitions to date is £2,866 million, whilst the forecast total cost is £3,196 million, compared with £2,974 million approved expenditure (adjusted for change in Cost of Capital to 3.5% from Apr 2003). This is well within the 20% tolerance for pre-Smart Acquisition approvals.
Acquisition Issues 8. Although Apache was procured pre Smart Acquisition, a costed Through Life Management Plan (TLMP) has been developed, including a 30 year strategic roadmap for the modernisation of the Platform, in alignment with the US Apache Programme. MOD has close discussions on all aspects of the programme with our US counterparts and wherever opportunities arise for cooperation, these are addressed through the US/UK Attack Helicopter Memorandum of Understanding. We are planning a Capability Sustainment Package for the platform, addressing issues such as digitisation of the battlespace, ensuring secure voice and data communications with other platforms; Beyond Line of Sight Communications in order to support deep operations; enhanced platform protection to counter the full range of future threats; and improved ability to deploy rapidly to support and conduct smaller scale operations. 9. As noted in Paragraph 4, following the NAO report on deficiencies in the delivery of training, Apache has managed the programme with requirements across all of the six lines of development in mind. These describe the full range of issues associated with the delivery of military capability and identify clear responsibility for each line of development at the appropriate level. This has been key to ensuring that the recent project milestones have been met.
In-Service Support 10. Apache has innovative support arrangements, comprising spares-inclusive repair contracts with industry for key Line Replacement Units (LRUs) including the on-shore Special Repair Activity (SRA) facility at Wattisham (an MOD-owned but Contractor-manned and -operated repair facility for Apache main sensors). These substantially reduce both repair turn round times and the need to hold repair spares stocks compared to MOD’s conventional logistic support model. For the future, the AH Support Reappraisal Project (SRP) is intended to reduce significantly WAH 64 whole life support costs. Initiatives being assessed include a range of investments in reliability improvements and a radical review of the aircraft maintenance policy. In parallel, the SRP Team is working up proposals for innovative long-term partnering arrangements to deliver further Whole Life Cost savings.
5. TYPE 45 ANTI-AIR WARFARE DESTROYER AND ITS PRINCIPAL ANTI-AIR MISSILE SYSTEM (PAAMS)
Project Summary 1. The Type 45 will be a versatile Destroyer capable of contributing to worldwide maritime operations in multi-threat environments. It will succeed the capability currently provided by the Type 42s. Equipped with the Principal Anti-Air Missile System (PAAMS), the primary role of the Type 45 Destroyer will be Anti-Air Warfare (AAW), but in addition, it will be a multi-role, general-purpose platform capable of operations across the spectrum of tasks, from peace support to high intensity warfare. 2. Recent achievements on the programme include: the opening of the Maritime Integration Support Centre at Portsdown (which will support the integration of the ship’s combat system); letting of a tri- national contract with France and Italy to procure the PAAMS systems for ships two to six; letting of a contract (through OCCAR) for the main PAAMS missile buy; the first factory transmission of the PAAMS Defence Procurement: Evidence Ev 87
multi-function radar; factory acceptance of the first two Rolls Royce WR21 gas turbines; and the start of main manufacture on the First of Class, HMS Daring, against a mature ship design. Main manufacture of the second ship (HMS Dauntless) is planned to begin in the summer of 2004.
Policy Context and Capability Requirement 3. The requirement to provide the capability oVered by the Type 45 Destroyer was re-confirmed during the Strategic Defence Review. The key requirements of the Type 45 are to protect itself and ships in its company from the threat posed by supersonic sea-skimming missiles and to contribute to the wider force anti-air warfare picture. As part of this it is required to provide tactical control of at least four fixed wing aircraft or four groups of aircraft assigned to the force. The Type 45 will also be required to operate its own organic aircraft (either Merlin or Lynx); embark a deployable force of Royal Marines and meet demanding targets for range, availability and growth potential. At present, all of these requirements are expected to be met. 4. Type 45 and PAAMS are planned to replace the capability currently provided by the Type 42 destroyer and its Sea Dart weapon system. It is planned that the Type 42s currently in service will be replaced progressively by Type 45s from 2007. 5. The current planning assumption is for the acquisition of a class of up to 12 Type 45s. 6. Commonality of many of the PAAMS systems and sub-systems, including in particular the Aster missile, will ensure a good level of interoperability with both France and Italy. The ship will be able to share its operational picture with allies, and control assets in theatre with NATO land, sea and air forces that are similarly equipped, providing maximum flexibility in force mix. The Type 45 is planned to be fitted with the UK Co-operative Engagement Capability which will greatly enhance the force situational awareness and bring the full benefits of the Sampson radar (leading edge radar technology that will form part of the UK PAAMS system) to other suitably equipped platforms in the task force. The Fully Integrated Communications System will provide the infrastructure to support a wide range of communications facilities, including Bowman, which will provide a secure command and control net with UK land forces.
Costs
7. Total expenditure on the project to 31 March 2004 is £1,421 million. The current forecast cost of the first six ships4 is **** against a cost approved at Main Gate, of £5,668 million.5
In-Service Date (ISD) and Service Life 8. The definition of ISD for the Type 45 is the date by which the First of Class will meet the Customer’s minimum operational requirement, as represented by all of the Key User Requirements. The ISD approved at Main Gate is November 2007; this is currently under review. Deliveries of the Class are planned to complete by the middle of the next decade. The Type 45 is planned to have an in-service life of 25 years, giving it an out-of service date in the 2040s.
Acquisition Approach 9. The Type 45 project is eVectively hybrid insofar as the warship element of the project was approved in the SMART era, while the original approval for PAAMS was in 1999, thereby pre-dating SMART. The project is currently in the Manufacture stage of the acquisition cycle.
Warship Acguisition Strategy 10. In late 2000, the MoD awarded a contract for the Demonstration and First of Class Manufacture to BAE Systems Electronics (the Prime Contractor Organisation—PCO). The MoD accepted a joint BAE Systems Marine/Vosper Thornycroft proposal for Marine to assemble the first six ships from “blocks” built by both companies. The contract was amended to this eVect in February 2002.
4 There is currently approval for the first six ships, LAP and associated missiles. Approval for further ships will be sought at the appropriate time, but probably by 2006. 5 The approval figure diVers from figures reported in previous years’ memoranda which included pre-Main Gate costs associated mainly with the Horizon Programme. The figures now quoted are consistent with those reported in the Major Projects Report. Ev 88 Defence Procurement: Evidence
11. This strategy was further refined in March 2003 when, following MoD agreement to a company request, BAE SYSTEMS announced that all of their Type 45 production work planned to be undertaken at Barrow would be transferred to their yards on the Clyde. This was to avoid the risk (which due to slippage on the Astute programme was then considered to be high) of conflict between the Type 45 and ASTUTE production programmes at Barrow.
PAAMS Acquisition Strategy 12. Following the termination of the Horizon programme, collaboration between the UK, France and Italy continued on PAAMS. Contracts are now in place (through the French contracting authority) for the development of PAAMS plus systems necessary to equip the first six Type 45s. To take advantage of economies of scale of the OCCAR managed Franco-Italian Future Surface to Air Family programme (which is a tri-service air defence programme using the same missiles as the PAAMS system) the main PAAMS missile buy is being managed by OCCAR through the FSAF programme.
Benefits of SMART Acquisition 13. The MoD and Prime Contractor are both committed to partnering on this programme, which provides the following benefits: (a) There is open-book working and a Charter outlining the responsibilities of both sides of the IPT which each side has confidence in. This has enabled issues and potential problems to be aired earlier than might have otherwise have been the case, leading to more eVective resolution. (b) A joint project control system is used by both sides of the IPT on a day-to-day basis which means that all those involved on the project have access to the same (up to date) information. (c) The prime contract contains a gain-share clause which incentivises both sides to maximise eYciency. (d) Early design maturity reducing risks introduced by change. (e) The ability to “progressively accept” the ship’s design thereby allowing issues to be dealt with as they arise rather than coming out during the production phase where they are more expensive in time and money to rectify. 14. In order to get Type 45 and PAAMS in service as quickly as possible, a strategy of incremental acquisition of platform capability, from a baseline standard which is both aVordable and achievable in the time to in-service date, has been adopted. This will enable the insertion of additional capability throughout the life of the Type 45s as requirements become aVordable and to take advantage of future changes in defence requirements and advances in technology. Following the placement of the Demonstration and First of Class Manufacture (DFM) contract on 20 December 2000 it was decided to accelerate part of the Incremental Acquisition Plan (IAP), and a hull-mounted sonar (the top priority in the Plan) will be fitted to all the ships on build. 15. The principal cost/capability trade-oV in the PAAMS programme has been the acceptance of a capability suYcient to meet the threat at ISD, rather than beyond. However, the PAAMS Full Scale Engineering Development and Initial Production (FSED/IP) contract includes a Growth Potential Study that examines the modifications that may be required to meet the emergence of more demanding threats and new capabilities.
Industrial Issues 16. The fact that there is an order for six Type 45s means that there is guaranteed shipbuilding work at BAE SYSTEMS’ yards on the Clyde, and at VT’s Portsmouth facility, until at least the end of the decade. In addition to the shipbuilding contractors involved, there are around 30 UK firms engaged as major sub- contractors with many more feeding into them. 17. With PAAMS systems for the first six ships now on contract, the main issue for industry will relate to the potential Type 45 class size and avenues for fitting PAAMS or pulling through its technology to other classes of ship. The key UK elements, Sampson and associated command and control, are specific to the Type 45. 18. Export potential for the Type 45 system as a whole is constrained by its high technological specification and cost, but elements of the system such as propulsion (the Rolls Royce/Northrop Grumman WR21 gas turbine), the electric propulsion system (Alstom), and PAAMS (in particular its associated multi- function radar) have considerable potential export prospects up to the value of several billion pounds over the next 15 years. Defence Procurement: Evidence Ev 89
In-Service Support 19. BAE SYSTEMS is leading study work to examine options for the optimum support solution for T45, expected to report in mid 2005.
Next Steps 20. The next significant steps for the programme are the beginning of production on the second of class (HMS Dauntless) in the summer of 2004, followed by launch of the first of class (HMS Daring) towards the end of 2005.
6. METEOR
Project Summary 1. Meteor is an all-weather, beyond visual range air-to-air missile, which is being procured from MBDA UK Ltd (formerly Matra BAe Dynamics) in collaboration with Germany, Italy and Spain (our Typhoon partner nations), France (for Rafale) and Sweden (for Gripen). It was selected in May 2000, following a competition between MBDA and Raytheon Systems Ltd. The combined design, development, production and support contract was placed on 23 December 2002 following approval and signature of the Meteor Memorandum of Understanding (MOU) by all partner nations. It is forecast that Meteor will enter service on Typhoon in 2012. 2. Meteor is currently in the Demonstration Phase. Since contract let, the project has been performing well against its schedule.
Policy Context and Capability Requirement 3. The Beyond Visual Range Air-to-Air Missile (BVRAAM) requirement is for a medium range air-to- air missile for Typhoon. Meteor will be the primary air-to-air weapon for Typhoon, and will provide a key capability in achieving and maintaining air superiority wherever Typhoon is deployed. Meteor will allow Typhoon to engage multiple and manoeuvring targets simultaneously, at greater range than before, in all weathers, day or night, and with greater survivability. The Strategic Defence Review concluded that BVRAAM remained a key capability. 4. Currently, Meteor is forecast to meet all the Key User Requirements agreed at Main Gate. The Meteor Main Gate approval includes a requirement to procure Advanced Medium Range Air-to-Air Missiles (AMRAAM) as an interim capability for Typhoon, pending the availability of Meteor. The total number of missiles is confidential but will be supplied if required. 5. The BVRAAM programme was conceived exclusively for Typhoon, where the main carriage method is semi-recessed under the fuselage—a key design driver. Meteor will be integrated on Gripen (for Sweden) and Rafale (for France) and will therefore be interoperable with these nations in addition to our Typhoon partners. Whilst the extant UK requirement provides only for integration on Typhoon, we are conducting an assessment of Meteor’s deployability from the UK’s Joint Strike Fighters.
Costs 6. Expenditure up to 31 March 2004 is £118 million. The current forecast cost (at 50% confidence) is £1,354 million, including the purchase of interim AMRAAM missiles, compared to a cost (90% confidence) of £1,362 million approved at Main Gate. The approval and forecast have been changed to reflect the revision to the Cost of Capital Charge. There has been a cost increase of £16 million since the last report, driven principally by: cost increases for AMRAAM; the net eVect of $ and ƒ exchange rate variations on AMRAAM and Meteor respectively; and increased provision for UK ranges for the trialing of Meteor.
In-Service Date (ISD) and Service Life 7. Meteor ISD definition is the achievement of an operational capability with an initial number of missiles and supporting infrastructure. 8. Current forecast ISD (50%) is August 2012, which matches the ISD of August 2012 (90%) approved at Main Gate. 9. Meteor has a 25-year design life, and is expected to remain in service until beyond 2040. 10. The delivery of the first batch of AMRAAM 120C-5 missiles to provide an interim BVRAAM capability for Typhoon will be complete by late 2006. Ev 90 Defence Procurement: Evidence
Acquisition Approach
11. The Meteor programme embodies a number of Smart Acquisition principles. Importantly, the contractor has agreed to a series of four key technological milestones, to demonstrate successful progress during the development phase. If MBDA fails to achieve any of these milestones, against clearly measurable and acceptable criteria, termination of the contract can be initiated, with all monies returned to the partner nations. 12. Meteor is a collaborative project with Germany, Italy, Spain, France and Sweden. An MOU, setting out the contractual, financial and management arrangements, has been signed by all partner nations. This appoints the UK as the lead nation; responsible for the procurement of Meteor on behalf of all the partners. Germany’s concluding signature of the MOU in December 2002 enabled the UK to award the Meteor contract to MBDA UK Ltd that same month. MBDA UK Ltd is the Meteor prime contractor and has placed principal subcontracts with its sister MBDA companies in France and Italy, and with suppliers in Germany, Spain and Sweden. The development workshare arrangements detailed in the MOU, and now reflected in the Meteor contract, are based principally on technical excellence, manageable risk, and best value for money. The UK development workshare is 39.6%. The Meteor contract covers development, production and in-service support (10 years from delivery of the first production missile). Currently, the other partner nations have committed only to development, but production and support options exist within the contract, which it is envisaged the partner nations will wish to exercise during the progress of the development programme.
13. Meteor employs a modular design, which facilitates the cost-eVective upgrade of sub-systems to exploit emerging technologies and to match the evolving threat. There are no current plans to enhance the missile’s performance once introduced into service, with the exception that the missile’s processing algorithms can be reprogrammed to optimise seeker performance against new targets and emerging counter- measure techniques. The energetic (ie explosive) elements of the missile are “lifed” items, and there is a planned mid-life replacement of these items.
14. No suitable “oV-the-shelf” missile was assessed as being able to meet the BVRAAM requirement. Options considered in the early stages, but deemed not to have the required performance to meet the full capability requirement, were: Raytheon’s AMRAAM; Matra’s MICA; Alenia’s Aspide; and the BAe Dynamics’ Active Skyflash.
15. A contract is being negotiated with the US manufacturer, Raytheon Missile Systems, for the procurement of the interim solution AMRAAM 120C-5 missiles, for delivery in 2006. Once those have been delivered, the current in-service stock of AMRAAM 120B missiles will be refurbished, re-motored and rebuilt as AMRAAM 120C-Ss, for use on Typhoon. Once Meteor becomes available, those AMRAAM 12CC-S missiles will continue to be available for use on Tornado F3 until its out-of-service date, and can continue to be employed on Typhoon for operations that do not demand the long range capabilities of Meteor. They can also be used on Joint Strike Fighter.
Industrial Issues
16. Industrial factors were taken into account in the assessment of bids. Meteor oVered particular advantages to the UK in terms of the quality and sustainability of the jobs involved. MBDA have stated that a total of 2,400 jobs would be created or sustained in Europe; 1,200 of which are in the UK.
17. Meteor has good prospects for sales, particularly as an integrated package on Typhoon. Sweden and France could widen the opportunities for overseas sales through sales of Gripen and Rafale, respectively.
In-Service Support
18. The aim of the Meteor Integrated Logistic Support strategy is to minimise the support costs whilst maintaining weapons availability. The weapon is being designed under an “all up round” principle (ie a complete munition that requires no assembly or maintenance immediately prior to loading) to reduce through life logistic support. MBDA will be responsible for the first 10 years of logistic support. Contracts after the initial 10-year period will be subject to negotiation.
19. All partner nations have indicated that they would like to pursue a collaborative logistic support contract for Meteor with the benefit of greatly reducing each partner nation’s support costs. The draft 10- year logistic support contract has been worded to enable any partner nation to join in this combined support contract as they commit to production. Defence Procurement: Evidence Ev 91
20. Provision of initial operator and maintainer instructor training and the associated training package are the responsibility of MBDA. Future continuation training will be undertaken with in-service resources. A number of ground-handling training missiles, telemetered operational missiles and explosive ordnance disposal training missiles will be procured.
Next Steps 21. The Meteor development programme is fully holding to its contracted schedule. Free jet trials of the ramjet motor in a supersonic wind tunnel are scheduled to complete in early 2005 and will provide the basis for clearance for the first air launched demonstration firings of the missile (from a Gripen aircraft), commencing in early 2006. These air-launched firings support the demonstration of achievement of the programme’s Key Milestones 1 and 2, scheduled for completion in late 2006 and mid 2007 respectively.
7. ASTUTE
Project Summary 1. The Astute Class will replace the existing Swiftsure and Trafalgar Classes of nuclear-powered attack submarines. Its greater weapons capacity, improved communications facilities, and enhanced ability to operate in the littoral represents a significant enhancement of capability for the Royal Navy. 2. In February 2003, the Government announced that it had reached agreement with BAE SYSTEMS on a way ahead for the Astute and Nimrod programmes. Since then a new structure for the Astute contract has been agreed which reduces risk, while placing new incentives on the company to perform. The MoD increased its funding by around £430 million (in cash terms) as against an increased contribution by BAE SYSTEMS of about £250 million. An amendment to the Astute contract to enact the “Agreement” was signed on 17 December 2003. 3. On 22 October 2003, Min (DP) performed the “keel-laying” ceremony for HMS AMBUSH, the second of the three Astute-class submarines on order. 4. The “Agreement” sought significant project management improvements. Since February 2003, all the programme’s anchor milestones planned to date have been met on time. The Earned Value Management technique is being introduced, and is due to provide initial reports by July 2004.
Policy Context and Capability Requirement 5. The 1998 Strategic Defence Review reiterated the need to maintain a strong, well-balanced maritime force, including a modernised nuclear-powered attack submarine capability, able to conduct joint operations with its NATO partners. Astute Class submarines will fulfil this role from 2009. They will be flexible, adaptable platforms with a global reach. As well as the continued role of SSNs in supporting Trident SSBNs, the Astute class attack submarines will undertake a wide range of other tasks, including: — supporting Special Forces; — land attack (Tomahawk Land Attack Missile -TLAM); — intelligence gathering; — support of surface forces such as task groups.
Costs 6. Expenditure to 31 March 2004 on Astute is £1,331 million. The current forecast cost of £3,498 million takes full account of the “Agreement”, compared to £2,578 million which was approved at Main Gate in 1997. Last year’s report made a forecast (in hindsight pessimistic) of £3,600 million ahead of the complex negotiations that followed.
In-Service Date (ISD) and Service Life 7. The ISD is defined as Stage 1 acceptance of HMS ASTUTE from the contractor, which encompasses “safe operation and the start of operational work up”. The current forecast ISD is January 2009, compared to that of June 2005 approved at Main Gate. 8. The in-service life of each Astute class submarine is planned to be 25 years. Ev 92 Defence Procurement: Evidence
Acquisition Approach 9. The prime contract for the Astute Class Submarine was placed in March 1997 which makes this project pre-Smart Acquisition. 10. Following restructuring and rebaselining of the programme, measures have been introduced to incentivise and improve project management. This includes the amended Target Cost Incentive Fee arrangement for the design and development, construction, testing and commissioning of HMS ASTUTE. HMS AMBUSH and HMS ARTFUL continue construction pending agreement of prices; once there is suYcient learning from the first submarine. Project management methods introduced include the use of anchor milestones, risk-sharing, Earned Value Management, joint MoD/BAE SYSTEMS three-point estimates, and knowledge transfer from the US submarine supplier, the Electric Boat division of General Dynamics. The MoD has increased its permanent presence at the Barrow shipyard and now works with much greater transparency between the MoD and BAE SYSTEMS on risks and opportunities.
Industrial Issues/Subsequent Procurement 11. The contract with BAE SYSTEMS is for three Astute Class submarines, HMS ASTUTE, HMS AMBUSH and HMS ARTFUL. The proposals for a second buy of up to three more Astute Class submarines had been expected during 2002, but diYculties with the existing programme have delayed this. BAE SYSTEMS’ equipment subcontractors have completed, or are nearing completion, orders for the first three submarines and are heavily dependent on future Astute orders. 12. BAE SYSTEMS continue to examine methods to reduce cost to benefit the Astute programme. As part of this, the company announced a rationalisation programme on 2 April 2004, to reduce their workforce by 760 people, following the delivery from the yard of the Landing Platform Dock, HMS BULWARK. 13. The MoD, with US DoD, has been facilitating assistance from the Electric Boat Division of the General Dynamics Company to help strengthen BAE SYSTEMS’ skills, notably in Computer Aided Design management, and to benefit from recent Electric Boat experience in the SEAWOLF and VIRGINIA submarine programmes for the US Navy.
In-Service Support 14. The strategy for an initial period of Contractor Logistic Support has been revisited. This has been made possible by the delay to the Astute programme, emerging Defence Logistic Organisation initiatives, and an inability to converge with Industry on an acceptable price for the novel, Prime Contract-led, support period. A definition study has been undertaken with key suppliers6 that successfully identified a framework for a new support solution. This is now being developed in a MoD-led Joint Integrated Project team with Industry.
Next Steps 15. Key future activities include: — Conclude the pricing of HMS AMBUSH and HMS ARTFUL once we have suYcient learning from the first submarine. — Consider further orders of the Class, recognising many factors, including: the plans for the retirement of in-service Swiftsure and Trafalgar Class submarines; the cost-eVective interval between successive submarines of the Astute Class; and BAE SYSTEMS cost and schedule performance on the first three submarines.
8. NIMROD MARITIME RECONNAISSANCE AND ATTACK AIRCRAFT MK4
Project Summary 1. The Nimrod Maritime Reconnaissance & Attack Mk4 (MRA4) will succeed the current Nimrod MR2 as the RAF’s maritime patrol aircraft (MPA), providing significantly enhanced maritime surveillance and attack capability (primarily Anti Submarine and Anti Surface Unit Warfare) through improved aircraft and sensor performance. The aircraft, training system and in-service support are being procured from BAE SYSTEMS (BAES) as Prime Contractor. 2. In February 2003 the government announced that it had reached agreement with BAE systems on the way ahead for NIMROD following identification of significant time and cost overruns and losses to the company. Since then, a new structure for NIMROD has been agreed which reduces risk and provides new incentives. This recognised that there was, and remains, no alternative comparable programme, as well as the potential of the NIMROD MRA4 aircraft to oVer longer term capability enhancements.
6 BAE Systems, Devonport Management Ltd, Babcock Naval Services and Rolls Royce Naval Marine. Defence Procurement: Evidence Ev 93
Policy Context and Capability Requirement 3. The Strategic Defence Review (SDR) confirmed the requirement for a maritime patrol aircraft with the capabilities of MRA4. The multi-role surveillance and attack capability provided by MPA facilitate and support the world-wide expeditionary deployment of joint UK forces, optimising access to the littoral. MPA are highly flexible and their capability is often used to provide much needed support to other tasks such as Homeland Security, *** and Search and Rescue, some of which will be in support of Other Government Departments (OGDs). 4. The currently planned requirement is for 18 MRA4 aircraft. The Nimrod MRA4 will provide longer range and patrol endurance, improved sensor performance and communications. Enhanced processing capability, greater automation and improved ergonomics will allow a reduction in crew numbers from the existing Nimrod MR2 minimum of 13 to 10. 5. Concept work on the adaptability of the MRA4 is exploring the extent to which the aircraft can serve as a multi-role platform, contributing to Network Enabled Capability and helping to meet the UK’s future Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR) needs.
Costs 6. Expenditure to 31 March 2004 on the Nimrod MRA4 programme is £1.8 billion. The current forecast cost for the programme is £3.5 billion compared to £2.8 billion approved at Main Gate and the £3.4 billion reported in last year’s survey. However, production prices beyond the three development aircraft remain to be negotiated.
In-Service Date (ISD) and Service Life 7. The In-Service Date (ISD) for Nimrod MRA4 is defined as the delivery of the sixth production aircraft to the Royal Air Force (RAF) together with the associated infrastructure and personnel to support the in- service use of the aircraft. The first series production aircraft is expected to be delivered in 2008; the currently forecast ISD is 2009 compared to the date of 2003 approved at Main Gate. The February 2003 Agreement between the MOD and BAE SYSTEMS made further production, beyond the first three development aircraft, dependent upon the design and development phase delivering a product of acceptable maturity. 8. Nimrod MRA4 has an assumed in-service life of 25 years based upon 650 flying hours per year. This results in an out of service date (OSD) of 2034, but a longer life may be feasible 9. Those remaining MR2 aircraft which have not been converted as part of the MRA4 programme will then be withdrawn from use in their present role. The timescale for this remains to be assessed in detail. MOD has already introduced improvements to existing Nimrod MR2 aircraft by using some of the technology planned for the new MRA4, thereby both reducing risk in the new programme and increasing existing capability.
Acquisition Approach 10. The MRA4 programme pre-dates the introduction of Smart Acquisition. The original 1996 contract for the supply of aircraft, training systems and an interim support package was the result of competitive tendering, with BAE SYSTEMS appointed as the prime contractor. 11. The February 2003 Agreement changed the contract from the previous fixed price basis, to a Target Cost Incentive Fee (TCIF) arrangement for Design and Development. A contract amendment to this eVect was signed on 23 February 2004. The Department believes the TOIF mechanism to be the best means of incentivising BAE SYSTEMS to deliver the aircraft without further cost and time slippage. Beyond an outer cost boundary of ***, the Department is liable to bear all of the excess (subject to Departmental approval for work beyond that point). Under the re-structured contract, design/development and manufacture have been separated as far as possible. This will reduce risk to the subsequent production programme. 12. The production price for all aircraft has yet to be negotiated, although a unit cost aim was set by the Agreement. The recent contract amendment therefore refers—but does not commit—to an option for the production of the remaining 15 aircraft. However, the contract allows for the approval of long lead items and activity to preserve skill sets in the supply chain, where appropriate, and minimise risk to the ISD schedule. In this context, and as part of the work done by BAE SYSTEMS under the old fixed price contract, substantial commitments have already been made to long lead materiel requirements for production. 13. The re-structured contract has provided a contract framework that has enabled the Department and BAE SYSTEMS to work together much more closely and eVectively, with combined resources and with regular reviews of risk and progress. The reformed project control system (integrated schedule, earned value management (EVM) and risk management) is in place and recent independent reviews have confirmed improving pace and progress. The MOD and the Company have committed to ensuring that a proportion of future payment is related to Earned Value performance. Ev 94 Defence Procurement: Evidence
Industrial Issues 14. The MOD has worked closely with the Company to restructure the Nimrod MRA4 programme so that design and development activity could be brought to an eVective and timely conclusion. Except for work being carried out by major sub-contractors, where we have agreed with the Company to allow work to continue rather than re-negotiate major contracts, the controlled stop in the supply chain has now largely been implemented, except to the extent where it makes sense to continue with low level production activity to protect essential skills and the schedule. 15. The re-start of production activity depends on acceptable design maturity, price negotiation and MOD approvals. The MOD and BAE SYSTEMS are working to determine the most cost eVective overall programme.
In-Service Support 16. Joint work with BAE SYSTEMS is on-going to define the scope and scale of the in service support structure for Nimrod MRA4, including engagement with the Company’s supply chain. This work will help to inform the quality of the cost estimates to inform departmental decisions about through life support. The aim is to develop commercial arrangements that enable a coherent, integrated support solution, inclusive of aircraft availability, to be in place for the Ready For Training (RFT) and Logistics Support Date milestones which need to be achieved before ISD.
Next Steps 17. The key priority remains the 3 aircraft development and manufacture programme, whilst work continues in parallel to develop the in service support solution, the most eVective further production programme and to further embed reformed programme management. 18. Engine trials are now underway on the first aircraft, PA-i. These will lead to low speed taxi trials in June 04 and then first flight, scheduled for July to August 2004 PA-2, evaluating the mission system, is scheduled to fly late 2004 and PA3 in mid 2005.
9. BOWMAN
Project Summary 1. BOWMAN will provide a secure, robust, tactical data and voice communications system in support of land, amphibious and air manoeuvre operations, to replace the Clansman combat radio and some of the HO infrastructure element of the Ptarmigan trunk communication system. It will be a key enabler of Network Enabled Capability and also play a major role in the MOD’s Command and Battlespace Management initiative under which it will be progressively integrated with specialist applications. It will serve as the primary means of voice and data communication for tactical level operations—characterised by mobility and undertaken by numerous individual fighting platforms and dismounted combatants—and will be based on radio communications that can operate without relying on fixed infrastructure. 2. The BOWMAN system will be made up of: a number of radio communications sub-systems that are connected to provide a tactical internet; a range of computers that provide messaging, situation awareness and management information; a local area sub-system that interconnects data terminals and voice users within a vehicle or group of vehicles forming a deployed divisional, brigade or battlegroup headquarters; and connections to trunk, satellite and strategic communications systems. It will have a capability for fast data communications and connections with external networks, and high-quality voice and data transfer. As well as being man-portable, BOWMAN will be an integral part of the communications fit of major equipments such as the Challenger two Main Battle Tank, helicopters such as Merlin, and warships, including T45. 3. BOWMAN achieved its ambitious ISD on 26 March 2004, ahead of the target of 30 March. On current plans, BOWMAN equipment will be fitted to some 20,000 vehicles, 139 naval vessels (including five capital ships) and 239 aircraft, and some 75,000 Service personnel will be trained to use it. Around 47,000 radios (excluding the Personal Role Radio) and 26,000 computer terminals will be procured.
In-Service Date (ISD) and Service Life 4. The BOWMAN ISD was defined as “a Brigade Headquarters, two mechanised battalions and support troops capable of engaging in Operations Other than War” (ie peacekeeping). The latest acceptable ISD date approved at the main investment point was December 2004. ISD was achieved on 26 March 2004. BOWMAN’s planned Out-of-Service Date is 2025. Defence Procurement: Evidence Ev 95
System Performance 5. The achievement of Key User Requirements is linked to the progressive stages of System Acceptance. For BOWMAN, this will be concurrent with the delivery of the operational war fighting capability in the land, amphibious and air manoeuvre components. The BOWMAN Initial Operating Capability was fielded and put through operational field trials towards the end of 2003. Further trials were conducted in March 2004 on an uplifted capability fielded to meet the ISD. We plan to field the Full Operating Capability later in 2004 to deliver the operational war fighting capability for the land component in 2005. 6. The provision of robust secure VHF and HF voice communications down to section level demonstrated during the trials conducted in March 2004 represents a step-change in capability for the Armed Forces. Voice intelligibility is proving markedly superior to CLANSMAN, electronic protection modes allows operation in a hostile electronic environment that would defeat CLANSMAN, and embedding a bespoke cryptographic processor has removed the need to use time-consuming methods of encoding critical tactical information. The ability of BOWMAN to deliver other functions, such as automatic position reporting and the ability to pass digital data around the battlefield, has been demonstrated and further trials of these are planned this summer. 7. International interoperability will be achieved through the implementation of all endorsed NATO Standards applicable to the operating environment. To achieve secure interoperability, BOWMAN mandates the endorsed NATO applique´ unit to meet NATO encryption interoperability standards.
Costs 8. Costs incurred to 31 March 2004 are estimated to be some £1,100 million. On a full resource basis, the current forecast Demonstration and Manufacture cost of BOWMAN is estimated to be £1,991 million compared with a cost of £2,041 million approved at Main Gate. These figures are consistent with the estimated acquisition costs, excluding long term support, previously reported.
Acquisition Issues 9. Where BOWMAN is mandated as part of a future capability supporting the land component, for example the Future Rapid EVects System, the additional equipment will be sourced direct from the suppliers within that procurement. Software upgrades to correct identified faults in, or to enable the integration of further specialist applications with, BOWMAN will be incorporated within an annual incremental acquisition supporting the land component Command and Battlespace Management capability. Although it is too early to approve plans to enhance BOWMAN, we recognise that there will be requirements to address hardware obsolescence and/or software unsupportability either on the basis of incremental acquisition or through periodic upgrades. We adopted an incremental acquisition approach and delivered the Personal Role Radio ahead of the main BOWMAN system. Spending more than the Smart Acquisition target on risk reduction activities during the Assessment Phase enabled the project quickly to re-open the competition following the decision to remove preferred supplier status from the Archer consortium in 2000. The Prime Contract incorporates smart acquisition principles, in partnering, incentives and a shared data environment with Industry.
In-Service Support 10. The Prime Contractor has been responsible for supporting the equipment since it entered service. An MoD developed support solution will be initiated from July 2004. The strategy is to use proven traditional methods of support on operations, while delivering an innovative, business-proven solution for more eVective support when not deployed on operations. These solutions will combine MoD and contractor provided support systems.
10. TYPHOON
Project Summary 1. Typhoon (formerly Eurofighter) is an agile fighter aircraft that will serve as the cornerstone of the RAF’s future fighting capability. It will bring a significant increase in our air superiority capability as it replaces the Tornado F3 while its multi-role capability will allow Typhoon also to fulfil the ground attack roles now performed by the Jaguar. Its adverse weather, multi-role capability will enable Typhoon to be employed in the full spectrum of air operations from air policing to peace support through to high intensity conflict. Typhoon is being developed in a collaborative project with Germany, Italy, and Spain. Contracts for the production of the first Tranche of 148 aircraft, of which 55 are for the RAF, were signed in 1998. Ev 96 Defence Procurement: Evidence
2. Typhoon achieved Type Acceptance in June 2003 which signalled the start of the process to bring the aircraft into service with the RAF.7 Following Type Acceptance, Typhoon flight test and safety evaluation was conducted and, after some delays, the first aircraft was accepted oV contract in December 2003. This allowed RAF Operational Evaluation and Service Instructor Pilot Training at BAES Warton to get under way utilising the 18 month initial contractor support arrangements known as “Case White”. The first solo RAF flight took place in February 2004 and to date, four RAF aircraft have been accepted oV contract. Very good progress has been made and some 100 sorties have now been flown. On 27 February 2004 the first instrumented production standard single-seat Typhoon made its maiden flight in Spain. 3. International Memoranda of Understanding (MoU) between the four partner nations envisage a total requirement for 620 aircraft to be procured in three tranches: 180 for Germany, 121 for Italy, 87 for Spain and 232 for the UK. The nations are committed contractually to the first tranche which includes 55 aircraft for the UK. Future production orders would commit the UK to 89 and 88 aircraft for Tranches 2 and 3, respectively. Industry proposals for Tranche 2 are currently being evaluated; Tranche 3 is not scheduled to be ordered before 2007.
In-Service Date (ISD) and Service Life
4. ISD is defined as the date of delivery of the first aircraft to the Royal Air Force and this was achieved in 2003. 5. The Typhoon ISD slipped by a total of 54 months compared with the date approved in 1987 at the start of formal development (the point now regarded as “Main Gate”). Of this slippage, 32 months has been attributed to diYculties with the application of complex technologies required to enable the equipment to meet the original StaV Requirement. The remaining 22 months delay was caused by the “reorientation” of the programme in response to the end of the Cold War, budgetary pressures on the four nations and to delays in signature of the MoU for the Production and Support phases. Of the 54 month overall slippage to ISD, a total of 12 months occurred after the award of the production contracts in 1998. 6. Every eVort is being made to accelerate the entry to service and work-up process to prevent or minimise any delay in the operational employment of Typhoon, scheduled for the second half of the decade. The Operational Employment Date (OED), defined as the date when Typhoon capability is declared to NATO, is currently ***, a date assumed in the latest budgetary round to provide a high-confidence basis for RAF planning. There is no gap between the planned out of service dates for the F3 and Jaguar fleets and the OED of Typhoon. 7. The service life of the Typhoon fleet is expected to be ***.
System Performance
8. Many of the Key User Requirements are not capable of demonstration at ISD either because they relate to in-service reliability over time, or because of the limitations routinely placed on a new aircraft’s initial flight “envelope” at such an early stage. Currently, only one of the 10 KURs is predicted not to be achieved and that relates to the aircraft’s landing distance. The shortfall (in the most adverse conditions) was accepted by the Department’s Equipment Approvals Committee in 1994. 9. The standard of aircraft delivered at ISD has proved satisfactory for initial service pilot training and for the operational test and evaluation activity planned for this stage in the programme. The Typhoon programme philosophy is to provide incremental capability clearances that match the evolving requirements of the nations’ air forces. The first of these, IOC, should occur towards the end of 2004. Full Operating Clearance (FOC) is defined as the functionality, cleared for operational use, of the last Tranche 1 aircraft. The precise level of capability to be provided at this stage is the subject of ongoing discussions between the nations and industry and will form the baseline for the Tranche 2 aircraft. The final planned capability increments will be delivered through Enhanced Operational Capability (EOC) packages which will be introduced after Tranche 2 deliveries start to provide Typhoon with the full, multi-role capability. The Meteor Beyond Visual Range Air to Air Missile is expected to be cleared for use on the aircraft at this stage. 10. Early experience, albeit with only 100 hours of UK in-service flying experience, has shown a good level of aircraft availability and reliability and pilot feedback is particularly encouraging. 11. Interoperability is fundamental to the Typhoon design. The programme has adhered to NATO Standardisation Agreements (STANAGs) and protocols to ensure Typhoon’s compatibility with current and future systems, both operational and logistic.
7 Type Acceptance is the process to confirm that a defined standard of aircraft has been properly documented, that the minimum acceptable performance standard has been demonstrated and that industry has provided the required safety evidence. Defence Procurement: Evidence Ev 97
Costs 12. Expenditure to 31 March 2004 is estimated at £8.6 billion. 13. Typhoon total UK acquisition costs are currently forecast at £19,018 million compared to £16,670 million at “Main Gate” approval dating from 1987, which represents an increase of some £134 million since last year’s review. The majority of this increase, some £1 30M, relates to Cost of Capital Charge (CoCC) increases as a result of an assumed six month delay to the aircraft’s ‘beneficial use date’ as defined for accounting purposes.
Acquisition Issues 14. The design standard of delivered aircraft will follow an incremental acquisition path, with the first aircraft being delivered to an initial standard—to allow early training—and the full standard delivered later to meet the declaration of operational capability. 15. The programme has encountered problems primarily due to the lack of development maturity and the major overlap between the various phases of the CADMID cycle. The main learning point, reflected in the Smart Acquisition reforms, is that a greater proportion of costs should have been expended on risk reduction activities prior to commencing development and reducing the large overlap between the phases. Actions have now been taken to ensure that these issues are fully addressed prior to placing the Tranche 2 production contract. 16. Whilst there are clear benefits from collaboration, the decision-making process can be slow and reconciling national requirements can be diYcult. The problems with lack of design maturity and overlap between phases was greatly compounded by the poor industrial organisation (in this case, national partner companies reporting to a co-ordinating management company) for understanding, planning and managing such a large and complex programme. The Smart Acquisition process has also highlighted shortfalls and ineYciencies in the way industry and work is organised. These issues are being addressed to ensure improvement in the industrial arrangements going forward with Tranche 2. Similarly, improvements are being sought in the organisation of the NATO Agency (NETMA) which administers Typhoon contracts on behalf of the four partner nations. 17. Unlike previous programmes, where major enhancements were incorporated via a major in-service upgrade, we shall, following Smart Acquisition principles, establish a programme for through-life evolution of the RAF Typhoon fleet. The aim is to acquire and incorporate emerging technology, on an incremental basis, to maintain the capability of the weapon system. Partnering between the MoD and industry will provide the necessary expertise and focus to enable us to identify, prioritise and pursue modifications to Typhoon that balance operational eVectiveness, life cycle costs, and component obsolescence issues. 18. Typhoon has major significance for the UK defence and aerospace industry sustaining some 16,000 direct UK jobs at BAE SYSTEMS, Rolls-Royce, and direct subcontractors such as Smiths. It is also expected to sustain, directly and indirectly, some 100,000 jobs across the UK when the aircraft is in full-rate production. Typhoon further helps secure key skills and important supply chain benefits which will maintain UK industry’s capability in advanced combat aircraft programmes.
In-Service Support 19. Support for Typhoon is being managed collaboratively to reduce life-cycle costs. MoUs and International Framing Agreements aim to ensure that all elements of the project are taken forward on an agreed international basis. Costs are shared by the four nations involved in the programme, based on a variety of funding “keys” depending on the type of support, but are broadly in proportion to the aircraft oV-take of each nation. This is the first major international project to apply integrated logistic support (ILS) procedures, thus enabling all aspects of logistic support to be optimised. Emphasis is being placed on partnering with industry to define the most cost-eVective solution. 20. The RAF is closely involved in the planning process, to ensure that the end users contribute to the development of support policy and have a clear understanding of the developing support concepts. The Typhoon support strategy will be compliant with the DLO Support Solutions Envelope. 21. From the limited time that Typhoon has been in RAF Service under Case White, it is not possible to draw any concrete conclusions regarding support. However, the early signs are encouraging. Aircraft serviceability rates have been satisfactory given the current immaturity of the Weapon System. RAF groundcrew find the aircraft easy to maintain at first line and have had little diYculty converting to the new “paperless” maintenance management system. When faults have occurred, diagnosis using the available test equipment and databus analysers has been relatively straightforward. “Teething” problems include the aircraft software generating a large number of spurious fault indications, which have had to be cleared laboriously on the Ground Support System at the end of each day’s flying. However, the next aircraft software release is imminent, which will largely eliminate this problem. Ev 98 Defence Procurement: Evidence
11. WATCHKEEPER
Project Summary 1. The WATCHKEEPER system will consist of unmanned air vehicles, sensors, and ground control stations. It will provide UK commanders in the land environment with a 24-hour, all-weather, Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR) capability, providing accurate, timely and high quality imagery to answer commanders’ critical information requirements. 2. Proposals for the delivery of WATCHKEEPER have been received from Thales and Northrop Grumman and are currently being assessed prior to the main investment decision.
Policy Context and Capability Requirement 3. The UK continues to move towards the goal of fully supportable expeditionary forces that are capable of decisive force projection and will be able to act rapidly and decisively at a place of their choosing and with an enhanced detect, decide and destroy capability. The Defence White Paper stresses the need to exploit new technologies, introducing multi-role capability and to develop a Network Enabled Capability, the heaviest burden of which will fall on the “key enablers” of “better intelligence and target acquisition”. The White Paper also stresses the need for the network to produce “eVects that can far exceed the sum of the parts”. This area is one where the capabilities oVered by a UAV system, such as persistence and endurance, are best able to contribute. UAV systems also oVer significant growth potential, allowing for inclusion of new technologies. 4. The Strategic Defence Review New Chapter identified the ability to gather information about an opponent and to then use it to maximum eVect as central to future combat capabilities in both high intensity conflicts and peace support operations. 5. Within this strategic context, WATCHKEEPER will be a critical element of tactical ISTAR capability in the land environment. It will enhance commanders situational awareness of the battlespace such that UK forces can achieve information superiority, thereby exploiting Network Enabled Capability to facilitate decision making and eVects-based targeting. 6. The broad range of users of the WATCHKEEPER product will require imagery and imagery intelligence (IMINT) for immediate support to manoeuvre operations concurrently at both unit and formation level. They will require access to imagery across the full range of climatic environments, the ability to identify and accurately locate targets of interest and provide data into the “kill chain” for subsequent engagement by weapon systems. The system is required to integrate with BOWMAN and the accompanying management applications to ensure that WATCHKEEPER is part of the Land communications network. WATCHKEEPER is required to be able to deliver a capability to support rapid reaction forces deploying by air or sea. The requirements include the requisite standards to achieve interoperability with other NATO UAV systems. 7. The number of systems to be procured is the subject of an ongoing assessment which will inform the main investment decision. We are aiming to procure suYcient systems to be able to support two concurrent Medium Scale deployments.
Costs 8. To 31 March 2004, expenditure on WATCHKEEPER has been £50.5 million. 9. The current forecast cost (at 50% confidence) for the Assessment Phase is £51.7 million against an Initial Gate approval of £51.7 million. 10. The overall cost of the programme is in the region of £1 billion.
In-Service Date (ISD) and Service Life 11. The definition and timing of the In-Service Date for an Initial Operating Capability for WATCHKEEPER will not be confirmed until Main Gate. Proposals have been solicited on the basis of delivering a UAV capability to support a Medium Scale warfighting deployment by the end of 2006. 12. The main investment decision for WATCHKEEPER is planned for late 2004. 13. The currently planned Out-of-Service date for the WATCHKEEPER capability is 2036.
Acquisition Approach 14. WATCHKEEPER was anchored in the Smart Acquisition process at Initial Gate. The programme combined three UAV Requirements (SENDER, SPECTATOR and the Phoenix Enhancement Programme) to derive a single statement of requirement. The acquisition strategy has been based on selecting UAV systems to suit a defined capability requirement rather than an air vehicle centred approach. Defence Procurement: Evidence Ev 99
15. The programme is completing the Assessment Phase of the acquisition cycle and is in the process of recommending the preferred system solution to support a main investment decision to enter Demonstration and Manufacture next year. Through evaluation and system concept demonstration, the Assessment Phase has driven down technical and schedule risks and derived the whole life costs associated with the proposed options. Trade-oVs between User and System Requirements continue to be identified and final decisions can shortly be made, taking full account of the impact across all Lines of Development and supported by balance of investment studies. 16. Alternative acquisition options have been considered. Collaboration was explored during the early stages of the Assessment Phase but it was not possible to align requirements. High levels of co-operation amongst allied nations on matters of requirement definition, technology, operational experience and acquisition are being maintained. 17. The requirement to deliver an early capability, coupled with the need for significant system integration with the emerging Network Enabled Capability requirements, has led the DPA and the potential prime contractors to adopt an incremental approach. This approach also supports the Force Readiness Cycle and provides for a phased uplift of capability at discrete intervals. 18. Opportunities to enhance WATCHKEEPER beyond the Full Operating Capability have been considered during the assessment, with options for enhancement included in the bidders’ proposals. Assets such as airframes will in any case need to be renewed during the life of the programme.
Industrial Issues 19. WATCHKEEPER will be the first major UK procurement of UAV systems since they achieved a heightened prominence for Defence. Both the potential prime contractors, Thales and Northrop Grumman, will oVer UK industry the opportunity for involvement in the programme and, potentially in the growing UAV world wide market through Industrial Participation and the transfer of UAV system technology to the UK.
In-Service Support 20. WATCHKEEPER will be operated and maintained by military personnel with in-depth repair carried out by the selected contractor. It will be supported by a comprehensive Contractor Logistic Support package and will be compliant with the Defence Logistic Organisation’s Support Solutions Envelope (SSE). 21. It is planned to have the initial logistic support elements in place by early 2006.
Next Steps 22. The next significant step for the project will be completion of the assessment of the two WATCHKEEPER bids, leading to a main investment decision currently planned for later in 2004.
12. FUTURE JOINT COMBAT AIRCRAFT—FJCA (FORMERLY FUTURE CARRIER BORNE AIRCRAFT—FCBA)
Project Summary 1. The Future Joint Combat Aircraft (FJCA) will replace the capability currently provided by the RN’s Sea Harrier and the RAF’s Harrier GR7/9 in the second decade of this century. The aircraft will be operated in a joint force, from both the new aircraft carriers and land bases, in the manner of the current Joint Force Harrier. 2. The Short Take OV and Vertical Landing (STOVL) variant of the US-led Joint Strike Fighter (JSF) has been selected to meet the requirement, and the UK is currently engaged in the System Development and Demonstration (SDD) phase of that programme, as the only Level 1 collaborative partner.
Policy Context and Capability Gap 3. The original FCBA requirement was intended to provide the Royal Navy with a new multi-role fighter/ attack aircraft to replace the Sea Harrier from about 2012. There has been no significant change to the requirement, in terms of the aircraft’s capabilities, since the StaV Target was approved in 1996. The Strategic Defence Review (SDR), however, concluded that we should plan to replace Invincible class carriers with two new larger aircraft carriers and establish the Joint Force 2000 (since renamed Joint Force Harrier), comprising RN and RAF elements. Therefore, the FCBA project assumed a common aircraft to replace both the Sea Harrier FA2 and RAF Harrier GR7, capable of being deployed in both land and sea based operations. FCBA was later renamed FJCA to reflect the move away from a purely sea based capability. Ev 100 Defence Procurement: Evidence
4. The important features of the Key User Requirements (KURS) are to provide a single seat supersonic aircraft, incorporating advanced “stealth” technology, that is capable of performing multi-role (ground attack, reconnaissance and air defence) operations from aircraft carriers and land bases, in pursuit of independent UK objectives or as part of coalitions with the US or other allies. Reliance on US framework capability has been fundamental to the success of operations in the Gulf since 1991 although, as indicated in the New Chapter to the Strategic Defence Review, there could still be a need for the UK to operate independently or as a lead nation in a coalition. 5. Interoperability is a key tenet for JSF in terms of maintaining commonality within the three variants of the aircraft and across national fleets. In addition, there are multiple information exchange requirements that seek to ensure interoperability within the Network Enabled Capability of the future. 6. As development has progressed, the work to mature the design to meet weight targets necessary to achieve desired performance levels has proved much more demanding than expected. Whilst the problem aVects all three variants, it is the STOVL performance projections that present the greatest concern given the tighter margins associated with this variant. A significant rebaselining of the SDD phase is in staYng for approval by the US Defense Acquistion Board (due June 2004), which will allow for additional design eVort to ensure requirements are satisfied through a range of options, including air vehicle weight reduction. The initial assessment of the outcome of this work is not likely to be possible before Summer 2004, when the necessary data will start to become available to estimate overall performance with a higher degree of confidence than is possible now. Until then, performance against the KURs is diYcult to predict, but the re-baselining will unavoidably carry with it a significant time and cost penalty to the JSF programme. The predicted ISD for the US Marine Corps STOVL aircraft, for example, is expected to slip from 2010 to 2012, whilst the overall cost of the SDD phase will rise by some $7 billion, from $33 billion to $4l billion, although not all of the cost increase is attributable to the additional design eVort. The consequential impact on the JCA programme is still being assessed. 7. The current UK planning assumption is for 150 Short Take OV and Vertical Landing (STOVL) aircraft. Final numbers will depend on the outcome of ongoing work to confirm overall future oVensive air capability requirements.
Costs 8. The spend on the project to 31 March 2004 is £342 million, of which some £144 million was incurred by the end of 2001–02 on the UK’s contribution to the US JSF Concept Demonstration Phase and UK Feasibility Studies. Despite the $7 billion increase to SDD, the UK contribution (in cash terms) to the phase remains at $2 billion, which equates to £1.4 billion using current mandated exchange rate assumptions. This contribution will be paid over an 11-year period that began in October 2001. 9. The current estimated cost of the JCA Demonstration phase including costs incurred on UK national work is £2.57 billion (50% confidence), against an approval (at 90% confidence) of £2.2 billion.The growth of £337 million reflects areas of cost increase oVset by decreases elsewhere. The increases include emergent aircraft system requirements, exchange rate fluctuation and a systematic re-examination of overall risk. The intention is further to examine cost, time and performance trade options to bring the programme back to within approval by March 2005. 10. Overall aircraft numbers, which have yet to be determined, will drive the cost of the programme. It is currently estimated to be in the region of £7–10 billion.
In-Service Date (ISD) and Service Life 11. The FJCA ISD is defined as the ability to conduct sustained operations with 8 aircraft. As a result of a new investment strategy to take forward Joint Force Harrier (JFH) into the era of FJCA and Future Carriers (CVF), we plan to increase the oVensive capability of our carrier-borne aircraft by upgrading the Harrier GR7 to GR9 standard and withdrawing the Sea Harrier FA2 from service in the period 2004 to 2006. ISD approval for FJCA will be sought in the Production/Support Main Gate, which is not likely to be required before late 2006, on the basis of current US programme timescales. The FJCA Out of Service Date is envisaged to be in the 2040s.
Acquisition Approach 12. FJCA is in the UK Demonstration phase of the CADMID cycle, although it predates Smart Acquisition. The JSF programme that is providing the solution is also pre-Smart Acquisition but accords with its principles. The joint US/UK programme oYce operates as an integrated project team, including close partnering arrangements between the programme oYce and the prime contractor, and operational staVs are contributing to the development of the requirement. The concept of “cost as an independent variable” means that through life aVordability has been taken directly into account, along with lethality, survivability and supportability, in the evolution of requirements and design solutions. The US programme Defence Procurement: Evidence Ev 101
has also made significant “front end” investment, for example through the Technical Maturation Program, designed to reduce risk by proving technology before it was oVered to both companies for potential incorporation in their solutions, and in the Concept Demonstration aircraft flown by both companies. 13. Seven other countries have now joined the JSF programme: Italy and the Netherlands as Level 2 Participants, and Australia, Canada, Denmark, Norway and Turkey as Level 3 Participants. Israel and Singapore have joined as Security Co-operation Participants (SCP) in JSF. SCP status is a separate bilateral arrangement with the US and does not involve accession to the joint programme MOU. 14. Alternative options considered for FJCA were a “navalised” Typhoon, the US F18E/F, the French Rafale and an updated Harrier. JSF was the clear value for money winner, on both cost and capability grounds. 15. JSF is an incremental acquisition programme. The SDD phase will provide a fully developed and tested aircraft as well as trained pilots. The Production and Support phases will be conducted on a multilateral collaborative basis and will be the vehicles for purchasing aircraft and support. An incremental approval approach to the phases is envisaged to minimise the risk inherent in concurrent development and production programmes. Block upgrade programmes will be the means to introduce performance updates, as required, throughout the life of the aircraft beyond ISD. It is too early to comment on the potential UK options for the post ISD work.
Industrial Issues 16. UK participation as a full collaborative partner in the JSF programme represents a significant opportunity for UK industry and the UK economy. UK companies have won, on merit, substantial high quality work valued in excess of £4.5 billion and this is expected to continue in the future production and support phases of potentially the largest military procurement programme ever. BAL Systems is a main player in the Lockheed-Martin team developing the aircraft and aircraft systems, and Roll Royce has major roles in the STOVL propulsion system (contracted with Pratt and Whitney) and the Fl 36 engine programme (contracted with General Electric), which will eventually compete against the Pratt and Witney F135 engine for aircraft fits. The requirement for the partner nations and world wide Third Party Sales is estimated to amount to between 3,000 and 5,000 aircraft, at a production cost that could reach over $3008n. UK industry can be expected to play a significant part in this work. 17. Central to the continued involvement of UK companies in the high technology areas of the JSF programme is Information and Technology release. Whilst a number of diYcult issues remain to be resolved, the UK has achieved considerable success in obtaining release of sensitive data at both a Government to Government and Government to Industry level. The release of information to meet the requirements of our involvement during the SDD phase is almost complete. 18. The requirement to provide the UK with the ability to operate and support the aircraft on a sovereign basis was set out in the UK Exchange of Letters (EOL) between the US and UK Defence Secretaries in January 2001. The UK intends during the next two years to refine further the detailed data release requirements and will work closely with our US colleagues in both Government and Industry to establish a jointly agreed sustainable plan. There are a number of issues to be considered in the context of a best value solution for the UK, including the establishment of an in-country assembly facility.
In-Service Support 19. Support arrangements are currently being examined, including the desirable extent of collaborative support and the role of industry in direct support. Detailed plans for the transition from the current Harrier fleet to FJCA will be formulated nearer the time.
Next Steps 20. The intention is for the UK to play a full part with the US over the next few months to determine the eYcacy of the SOD re-baselining eVorts. Once the necessary initial data is available in the Summer, an assessment will be made of the ability of the STOVL variant to meet UK KURs, together with impacts, if any, on the design of the CVF. 21. Despite these problems, other areas of development are proceeding satisfactorily. For example, the first mechanical component for the SDD phase aircraft was produced in November 2003, and the F135 engine that will be fitted to the first production batches of the aircraft has passed its Critical Design Review ahead of schedule and testing is well advanced. The propulsion system for the STOVL variant, comprising the Fl 35 engine and the lift fan and roll ducts, is scheduled to commence testing in April 2004, some six weeks ahead of schedule. Ev 102 Defence Procurement: Evidence
13. FUTURE STRATEGIC TANKER AIRCRAFT
Project Summary 1. The Future Strategic Tanker Aircraft (FSTA) is planned to replace the Air Refuelling (AR) and elements of the Air Transport (AT) capability currently provided by the RAPs fleet of VC1O and TnStar aircraft. The Ministry of Defence is considering whether the capability could be provided through a service contract, under the Private Finance Initiative (PFI). Under such an arrangement, a contractor would own and maintain the aircraft and provide training services, infrastructure and some personnel, whilst the RAF would be responsible for all military operations. The contractor would be able to earn commercial revenue, using spare aircraft not required by the RAF in peacetime, to oVset the cost of the service. 2. On 26 January 2004, the Secretary of State for Defence announced that a bid from AirTanker Ltd, a consortium comprising EADS, Rolls Royce, Cobham and Thales, had been judged to oVer the best prospective PFI solution. AirTanker Ltd proposed a service solution utilising Airbus A330 aircraft. Negotiations are currently being taken forward with AirTanker Ltd.
Policy Context and Capability Requirement 3. The Strategic Defence Review highlighted that “the ability to rapidly deploy, sustain and recover our forces is of critical importance if we are to be able to respond quickly to future crises”. This indicates the continuing need for an AR capability, to provide force multiplication and operational range enhancement for front-line aircraft across a range of defence roles and military tasks. The importance of AR has been demonstrated on operations over many years, and remains a central element of defence capability in this era of expeditionary warfare. Its importance has been reaYrmed in the Strategic Defence Review New Chapter and in last year’s Defence White Paper. 4. The RAF’s fleet of 19 VC10 and nine TriStar aircraft provide current AR/AT capability. All of the VC10s and six of the TriStars are configured for AR and of these 11 VC1O0 and six TriStars are also capable of carrying passengers and freight. Three TriStars are configured for the passenger carrying role. The VC10s first entered service in the 1960s while the TriStars first entered RAF service in the early 1980s. The VC10 was retired from commercial airline service in the early 1980s and the type is now unique to the RAF. Therefore, our current AR aircraft, particularly the VC10s, are old and in need of replacement. FSTA aims to provide the RAF with a modern and eVective replacement AR capability, commencing from around the end of the decade.
Costs 5. The FSTA programme is currently in an assessment phase designed to confirm whether a PFI solution can provide the required capability at best value for money. At 31 March 2004, the cost of the assessment phase is estimated to be £24 million, at 50% confidence. This compares to a cost of £13 million approved at Initial Gate. The variation results from the Department’s need for additional external legal and financial advice, following an extension to the Assessment Phase (£21 million), coupled with an agreement, in Oct 2002, to fund some of industry’s assessment phase risk reduction work (£10 million). The estimated whole life cost of the PFI programme is shown in the table below:
£m (outturn prices) Lowest Most Likely Maximum Current forecast cost of PFI programme 11,300 12,300 13,100 Forecast cost of PFI programme at Initial Gate — 12,400 13,900
In-Service Date (ISD) and Service Life 6. On current plans, it is anticipated that a PFI service would commence around the end of the decade. However, FSTA project timescales are dependent upon the outcome of ongoing discussions with AirTanker Ltd. AirTanker Ltd has been judged to oVer the best prospective value for money PFI solution to the FSTA requirement, but a number of complex issues remain to be resolved before the Department can be confident that a PFI solution could provide a value for money and aVordable solution. Consequently, the Department has decided not to make a final decision about whether to proceed with PFI until further contract negotiations with AirTanker Ltd have been completed. 7. A PFI contract of around 27-years duration is anticipated. This would break down, broadly, into a four-year establishment phase, a three-year transition phase and 20-years of full service capability. The In- Service Date would fall between commencement of the PFI service (known as the Introduction to Service Date) and the date on which full service capability is achieved (the Full Service Date). The expected date for achievement of ISD is also subject to ongoing discussions with AirTanker Ltd. Defence Procurement: Evidence Ev 103
8. ***.
Acquisition Approach 9. FSTA was nominated as a potential PFI programme in 1997, when it was judged that the project, scoped as a service, could oVer better value for money than conventional asset-based procurement. A key tenet of the PFI acquisition strategy is the potential to transfer the through life risk of ownership of the aircraft assets to the private sector. Considerable innovation could also result from the PFI approach. This includes the opportunity for the contractor to earn commercial revenue through third party use of the aircraft assets. Furthermore, a mix of Regular RAF and civilian contractor personnel, some of whom will have a Sponsored Reservist obligation, will be employed in delivery of the service.
Industrial Issues 10. Industrial issues were not a factor in the selection of AirTanker Ltd. Both PFI bids oVered potential benefits for UK industry. A PFI contract could be expected to create or sustain several thousand jobs in the UK, over the lifetime of the service. The UK decision to take forward single bidder negotiations with AirTanker Ltd represents an opportunity for Airbus to gain a foothold in the global air refuelling market, which is currently dominated by Boeing.
In-Service Support 11. In service support of the aircraft and associated infrastructure is planned to be an integral part of the PFI contract, although the support arrangements are being mapped against the Support Solutions Envelope model developed by the Defence Logistics Organisation. In order to safeguard our ability to deploy the operational capability eVectively, Regular RAF maintenance personnel will be employed in support of the aircraft. They will work alongside civilian contractor personnel, some of whom will have a Sponsored Reservist obligation.
Next Steps 12. Negotiations aimed at agreeing a PFI contract that is acceptable to all parties are underway. Successful completion of these discussions represents the next key milestone for the project. The Department plans formally to review progress in the Summer of 2004.
14. FUTURE RAPID EFFECT SYSTEM (FRES)
Project Summary 1. The Future Rapid EVect System, FRES, will be the central pillar of a capable, coherent and highly deployable medium Land Force, networked to harness joint eVects, and with broad utility across the spectrum of operations. It is envisaged that FRES will significantly enhance the speed at which Land Forces can operate and the eVect they can bring to bear through improvements in mobility, lethality and a reduced logistics footprint. It is anticipated that the capability will be provided by a family of medium-weight armoured vehicles that will replace the GVR(T) series, Saxon, elements of the existing FV430 series. 2. The FRES Initial Gate investment decision was approved in April 2004. Achieving Initial Gate took longer than expected, but it was important to get our strategy right in order to lay solid foundations for success. We therefore spent time considering how best to balance a number of issues such as a challenging and complex requirement, technological risk and the need for an early deployment of the capability.
Policy Context and Capability Requirement 3. In setting out the need for the UK to be able rapidly to project military power world-wide, the Strategic Defence Review (SDR) made specific reference to FRES. The New Chapter further explained the strategic context for the requirement, stating that as part of our move towards more rapidly deployable forces we are pursuing the concept of a Future Rapid EVect System, a family of air-transportable medium-weight armoured vehicles. 4. Ongoing Future Army Structures work envisages restructuring the Army into the “Balanced Force” with heavy, medium and light brigades. The Future Land Operational Concept provides the conceptual basis for the development of the Balanced Force, capable of operations across the full spectrum of conflict but with a significantly improved rapid intervention capability. Ev 104 Defence Procurement: Evidence
5. FRES will provide a capability to deploy an eVective, combined arms land based force between the two existing extremes of heavy armour (slow to arrive and with a large footprint) and light forces (quick strategic deployment but limited endurance and reach). It must be able to be deployed quickly with minimal logistical support in agile combined-arms force packages to engage in missions across the spectrum of conflict from war-fighting to peacekeeping and be able to achieve knowledge superiority and contribute to Network Enabled Capability through its own and linked assets. 6. FRES will be the first Land combat vehicle system fully able to exploit the capabilities of Command and Battlespace Management (CBM). The plan is to network FRES so that it can greatly enhance joint force situational awareness, sensor-shooter links, flexible reorganising, agility and eVects-based planning. This will result in improved control, targeting precision and time sensitivity, rapidity of eVect and force protection. 7. The FRES capability will embrace a number of roles, including Protected Mobility, Reconnaissance and Communications. The size of the force will be determined during the Assessment Phase, informed by any trade-oV decisions that are made. 8. The four requirement drivers for FRES are: the need for an armoured rapid eVect land capability; wide operational utility; maximum interoperability with other parts of deployed forces, other components and allies; and the need to address the obsolescence of existing fleets. The priority for the FRES programme is to deliver the central pillar of a credible and balanced land medium rapid eVect capability, thereby helping to fill the significant capability gap between the current heavy and light forces. 9. FRES will be required to integrate fully with a wide range of battlefield assets to enable the delivery of joint eVects. It will also be expected to support joint operations with NATO allies. Achievement of interoperability requirements is a factor to be addressed during the Assessment Phase. 10. Co-operation during the Assessment Phase is likely to focus on harmonising requirements for interoperability in support of coalition operations and mitigating common areas of technology risk. However, opportunities for collaborating on sub-systems and sharing information on technologies and requirements will be explored during the Assessment Phase, and the scope for future collaboration assessed prior to the Main Gate investment decision.
Costs 11. The full Programme cost has yet to be established, but the provision could be in the region of £6 billion. Whole life costs are expected to be in the region of £50 billion.
In-Service Date (ISD) and Service Life 12. FRES has just achieved Initial Gate, and ISD will not be formally endorsed until Main Gate. One of the aims of the Assessment Phase work will be to identify and reduce risk in the programme to enable us to define an appropriate ISD in both capability and programme terms for endorsement at Main Gate. The planning assumption is to introduce the early variants of FRES around the end of the decade, with a phased approach to achieving full operational capability. 13. FRES is expected to be in service for some 30 years. The ability of potential solutions to accommodate incremental enhancements to upgrade the capability by exploiting new technologies in response to changing threats will be a key consideration for the Assessment Phase.
Acquisition Approach 14. The acquisition strategy for the Assessment Phase was determined against the key principles of harnessing the broadest range of industrial capability, creativity and innovation, and keeping open the widest possible options for all future phases in order to best meet our requirements. The endorsed approach is to engage a Systems House (SH), through a short competition, to lead the initial Assessment Phase. The SH is required to be independent of product or manufacturing capability and will be selected for programme management, risk management, systems engineering and supply chain management capabilities. It will therefore be in a strong position to leverage the widest possible industrial involvement whilst leaving the options open for future acquisition phases. As well as the capabilities noted above, the SH will bring an objective view of the ideas and technologies which may be applicable to FRES, and a detailed understanding of the risks inherent in complex “systems of systems” integration. 15. Our intention is to take an incremental approach to capability acquisition for the FRES programme; this will, in particular, apply to the insertion of technologies as they mature. FRES is not intended to be a high technology risk programme, but there is a need to mitigate the risks of certain technologies in order to determine if they are suitable for FRES. Much of this risk reduction work will be carried out during the Assessment Phase. Defence Procurement: Evidence Ev 105
16. The planned Integrated Technology Acquisition Programme (ITAP) approach links technology to capability in order to enable the pull-through of mature technologies at the optimum time without delaying the implementation of FRES. A series of Technology Demonstrator Programmes (TDPs) will be undertaken during the Assessment Phase as a means of assessing and, where necessary, accelerating, the maturity of technologies and enablers. Technologies will only be considered for inclusion in FRES if they are at an appropriate level of maturity at pre-designated key decision points. 17. It is too early in the project to determine the strategy for future phases, however a range of alternative options will be explored during the initial Assessment Phase in order to arrive at the optimum strategy for later phases. 18. The project is looking to exploit Smart Acquisition initiatives and to identify and pursue additional opportunities to introduce new or revised practices to deliver the FRES capability. The size and impact of the project oVer the potential to improve existing processes and procedures, and implement innovative ideas.
Industrial Issues 19. Industrial issues related to FRES are being assessed in line with the Defence Industrial Policy, and in association with Other Government Departments, in order to determine how these issues may influence the project. The detailed development of acquisition options will be made against the background of wider industrial factors. One of the considerations will be the potential role for the UK Armoured Fighting Vehicle industry. 20. The FRES programme is at an early stage, therefore it is diYcult to assess future export opportunities. However, we would expect it to attract interest from potential export customers, based on both the export success of some of the vehicles it is planned to replace and the interest expressed by other nations in a medium force capability.
In-Service Support 21. A key requirement of FRES is the need to sustain operations of extended duration and operate over long lines of communication with limited transport assets. This will necessitate high levels of operational availability, and significantly reduced logistic demands. It will need to be frugal in its consumption of fuels, oils, road gear (tracks or wheels) and technical spares in comparison with the current in-service equipment. It must be reliable and easy to maintain and service. The anticipated improvements in eYciency will contribute to speed of deployment and reduce the logistic footprint. 22. Development of the support strategy for the system will be an important element of the work to be conducted during the Assessment Phase.
Next Steps 23. It is imperative now to proceed with the planned Assessment Phase activities, and to regain the momentum on this important programme. The broad aims of the Assessment Phase are: to further define the FRES capability required within the developing medium force and network enabled operational concepts and thus develop a series of aVordable options for meeting the FRES requirement; to develop optimum procurement and support strategies for future phases in order to present a robust case at Main Gate; and to manage technology and supplier risk to acceptable levels.
15. FUTURE CARRIERS (CVF)
Project Summary 1. Under the CVF project, we will procure two large aircraft carriers to replace the three Invincible-class carriers from around 2012. These carriers will operate the Short Take OV and Vertical Landing (STOVL) variant of the Joint Strike Fighter (which has been selected to fill the role of Joint Combat Aircraft), the Maritime Airborne Surveillance and Control (MASC) capability and other aircraft in a variety of roles. 2. CVF received Initial Gate approval in December 1998 and in November 1999, competitive contracts for the Assessment Phase were awarded to BAE SYSTEMS and Thales UK. Following the January 2003 announcement of an alliance approach involving BAE SYSTEMS, Thales UK and the MOD as the best method for delivering CVF, Stage 3 of the Assessment Phase formally started on 5 September 2003 and ran until 31 March 2004. Work is continuing to develop the carrier design to a high degree of maturity and the MOD is discussing the alliancing strategy for the Demonstration and Manufacture (D&M) Phases with the two companies. The programme remains on target to meet the ISDs of 2012 and 2015. Ev 106 Defence Procurement: Evidence
Policy Context and Capability Requirement 3. The requirement for the Future Aircraft Carrier (CVF) was endorsed in the Strategic Defence Review (SDR) which identified a continuing need for rapidly deployable forces with the reach and self-suYciency to act independently of host-nation support. The SDR concluded that the ability to deploy oVensive air power will be central to future force projection operations, and aircraft carriers can provide valuable flexibility in a range of operational circumstances. The SDR conclusions were endorsed by the New Chapter work of 2002 and the Defence White Paper in December 2003. 4. It was therefore decided to replace the three INVINCIBLE-class carriers with a new class of two larger and more capable carriers known as CVF. These ships—which will be called “Queen Elizabeth and Prince of Wales”—will have the objective of supporting an increased emphasis on oVensive air operations and force projection as a central component of joint maritime operations. 5. The design parameters for the ships continue to evolve to meet our capability requirement; as a routine part of the Assessment Phase, cost capability trade-oV work has been carried out to ensure that the programme provides the best value for money capability that is consistent with the needs of defence policy and is aVordable within the overall defence budget. We anticipate being in a position to refine our assumptions towards the end of the year and in the meantime, our primary focus remains on delivering the capability that oVers the best value for money solution.
Costs 6. Costs incurred to the end of 31 March 2004 (including pre-feasibility studies) total around £153 million. This represents an increase of £35 million over the approved Initial Gate costs of £118 million as a result of the revised procurement strategy and renegotiations to the Stage 3 contracts that were placed with the two companies in September 2003. The costs remain within the boundary set for the project. 7. Estimates for the Demonstration and Manufacture (D&M) are being prepared on a progressive basis throughout the Assessment Phase. The current estimate of most likely (50%) cost for the carriers is around £3 billion (including combat system but excluding the aircraft). Cost of Capital charges add a further £450 million to the estimate. Total acquisition costs are being refined during the remainder of the Assessment Phase to take into account maturing design and price information from BAE SYSTEMS and Thales UK.
In-Service Date (ISD) and Service Life 8. ISD will be declared when the military capability provided by CVF is assessed as available for operational use. The first CVF is scheduled to enter operational service in 2012 and the second in 2015. Current work in the CVF Assessment Phase suggests that it is possible to meet these dates, although work is continuing to identify the optimum design and build strategy. Each CVF is planned to have an in-service life of 30 years with a stretch target of up to 50 years.
Acquisition Approach 9. The CVF Assessment Phase began in November 1999 with the award of competitive contracts to BAE SYSTEMS and Thales UK and has been split into a number of phases. Stage 1 involved the examination of several carrier designs and an assessment of the costs of extending the lives of the three existing carriers by 10 years to provide a baseline against which the cost eVectiveness of all the options could be evaluated. During Stage 2, BAE SYSTEMS and Thales UK concentrated on refining their designs and taking key trade-oV decisions. From September 2002, work concentrated on building the carriers to an innovative, adaptable design which will enable them to operate the STOVL variant of the JSF aircraft; and with modifications, a further generation of conventionally launched aircraft. This represents a sensible way to secure the best return from our investment in the carriers and good long term value for money. 10. An innovative Continuous Assessment process was used throughout Stage 2 to evaluate the contractors’ performance. This concluded that an alliance approach involving BAE SYSTEMS, Thales UK and the MOD represented the best approach to delivering CVF within the time and cost parameters. The alliance procurement strategy was announced in January 2003. The alliance is envisaged as a co-operative relationship between the customer (the MOD) and the key contractors which will enable us to make the most of the resources and strengths of all the alliance members with the shared objective of improving on agreed performance targets. 11. A third Stage of the Assessment Phase was taken forward on the basis of an evolving alliance approach and formally started on 5 September 2003. The maturity of the design was increased and discussions continued to be held with the companies on the alliancing strategy to take the programme through the D&M Phases. Design maturity has already reached a comparatively higher level for CVF than for other legacy maritime projects. We believe that the alliance approach remains the best method for delivering the programme to time and cost. Stage 3 completed on 31 March 2004. Advice has been submitted to Ministers on the way forward for the programme, and an announcement is expected shortly. Defence Procurement: Evidence Ev 107
12. Opportunities for international co-operation are being reviewed during Assessment, especially for equipment systems and subsystems. Although whole ship collaboration is unlikely to be a viable option, opportunities to share best practice in assembly integration and outfitting will be explored. In particular, discussions are continuing with the French and US to explore areas for possible co-operation in common areas of aircraft carrier technology at a system or sub-system level. There is agreement between the UK and France, at Ministerial level, that industry to industry co-operation represents the best way forward for any UK/France co-operation on aircraft carrier issues. 13. The CVF programme is adopting and further developing a range of Smart Acquisition techniques and has embedded a number of Smart Acquisition processes into its activities with the Aircraft Carrier Team (formed by BAE SYSTEMS and Thales UK). A greater emphasis is being placed on identifying, evaluating and implementing eVective trade-oVs between system performance, whole-life costs and time. Incremental acquisition is being adopted in areas such as mission systems, which will allow for the incorporation of up- to-date technologies to avoid obsolescence. SMART project management processes are being used to achieve early risk reduction, such as the use of Technology Readiness Levels (TRL) to ensure that any technologies that need developing have reached a suYcient TRL at appropriate points within the acquisition cycle. We are also developing a mature risk assessment process based around a joint risk register, linked with Earned Value Management (EVM), which enables the project team to track and manage key risks and ensure that, if required, appropriate mitigation strategies are being implemented.
Industrial Issues 14. In accordance with current government policy for the construction of Royal Navy warships, the CVF will be assembled in UK shipyards. Industrial factors were taken into account in the decision to adopt the alliance approach for CVF; in January 2003, we identified that, subject to value for money considerations, the best way forward was for CVF to be potentially built by a combination of four UK shipyards (BAE SYSTEMS Naval Ships at Govan, Vosper Thornycroft at Portsmouth, Swan Hunter on Tyneside and Babcock BES at Rosyth) although the involvement of other UK yards has not been ruled out. This approach was underpinned by a detailed analysis of facilities, capabilities and likely capacity across the UK shipbuilding industrial base. Final decisions will be made based on achieving value for money while taking due account of the capability, capacity and resources of UK industry to meet the full range of planned naval programmes. Discussions are continuing with the yards on the precise arrangements and work allocation on this basis. The predicted overall loading in the yards during the CVF construction timef name is also being examined. It is estimated that CVF will sustain or create some 10,000 jobs across the UK during the course of its design and manufacture. 15. It is unlikely that this project will lead directly to whole-ship sales, although the commercial marketing of CVF design skills and production technology could benefit UK industry. Much of the ship’s equipment could have export potential. Industrial Participation proposals will be invited, as appropriate, for oVshore content of the proposed solution.
In-Service Support 16. Contractor Logistic Support (CLS) will be considered for some or all of the maintenance and logistics and OLS options for up to 30 years are being examined during Assessment. One option to be considered is the adoption of best practice in supply chain techniques, to minimise MOD ownership of spares, by contracting for agreed spares availability from industry. We are also developing options to let a contract for an Initial Support Period up to and including the dry docking of the first vessel. 17. The upkeep cycle of the CVF will reflect both the vessels’ modern design and developments in upkeep practice such as “reliability centred maintenance” rather than lengthy and expensive refits. This will enable availability requirements to be met by only two carriers.
Next Steps 18. Stage 3 completed on 31 March 2004. Advice is currently with Ministers on the way forward for the programme, and an announcement is expected shortly. In the meantime, work on the project continues and negotiations are on-going between the MOD and the companies over the alliance strategy for the Demonstration and Manufacture phases. The target ISDs for the carriers remain unchanged at 2012 and 2015. April 2004 Ev 108 Defence Procurement: Evidence
Memorandum by the Defence Engineering Group
SMART ACQUISITION—UNFINISHED BUSINESS?
Introduction In 1998, as part of the Strategic Defence Review (SDR), the Ministry of Defence (MoD) launched the Smart Acquisition Initiatives (originally known as Smart Procurement) to address some of the perceived problems besetting its programme of defence equipment acquisition. These problems included: Overlong time-span from a project’s concept to its entry into service—the Eurofighter Typhoon, for example, was first approved in 1984 and will not enter service till 2006, or later. Overruns in cost and delays in timescale—the 1998 Major Projects Report from the National Audit OYce (NAO) showed overruns up to 60% and delays up to 10 years. Failure to balance properly project performance, cost and timescale—projects appeared to be locked into their original system requirements and annual budgets. Undue transfer of technical and commercial risk to contractors, some of which lacked the resources to manage them adequately. InsuYcient delegation of authority to project managers, and a lack of personal incentives for MoD personnel. The Smart Acquisition Initiatives introduced to address these problems can be divided into two categories. Some of the Initiatives are widely accepted to be advantageous; they had often been recommended and accepted in the past, but had not yet been implemented eVectively. This category includes: A through-life approach. Rigorous early testing, analysis and planning. Accurate forecasting of project cost and timescale. The Initiatives in the other category were in 1998 new to MoD and their benefits were unproven, including: Reorganisation of procurement, logistics and research A new, shorter acquisition cycle called CADMID. Partnering with industry. Integrated Project Teams (IPT). A capability-based approach to Service requirements. Personal incentives for MoD personnel.
Smart, but Not New!
Through-life approach The through-life approach to project management involves taking account of all the costs and benefits associated with the project through its complete life cycle from concept to disposal. This approach was praised by the House of Commons Defence Committee (HCDC) in 1988 and by the NAO in 1992, as well as by the SDR in 1998, and has been mandatory for all public sector projects since 1991 but it is actually quite diYcult to implement. Forecasting the through-life cost of a defence project over more than half a century of development, production, operation, support and disposal is a challenging task, and the resulting forecast is inevitably subject to considerable uncertainty. Some MoD engineers and accountants are accustomed to precision and find such through-life cost forecasts unhelpful or “really too diYcult”. Since this approach was reinforced in the SDR, a Cost of Ownership (COO) methodology for calculating through- life cost has been formulated, but not all IPT have yet applied it and the data assembled so far are immature and unable to support decision-making. Even six years after the SDR, no forecasts of through-life costs of the MoD’s major projects have yet appeared in the annual report on these projects from the NAO. Even where credible forecasts are available, it can be diYcult for Ministers, oYcers and oYcials (whose tenure in post may last only a few years, and whose reputations depend on the progress of a project within that period) to give due regard to prospective costs and/or benefits many years later. A through-life approach to any project is also inhibited by the bureaucratic divisions of responsibility and budgets between the various MoD stakeholders involved. Defence Procurement: Evidence Ev 109
Preliminary work Defence equipment projects in their initial phases need to undertake considerable testing, analysis and planning in order to manage the technical and other risks, to balance project performance, cost and timescale and to formulate a coherent plan for the project to progress smoothly and uninterrupted through its later phases. MoD accepted earlier recommendations in 1961, 1968 and 1988 that suYcient resources should be allocated to the early phases of its projects, and it has been demonstrated that projects which neglect to do enough work in those phases are more likely to encounter problems later, but in practice many pre-Smart projects failed to do the necessary risk reduction and planning and proceeded blindly into diYculties. The amount of work required in the early phases of a project before its definitive financial approval (at what is now called Main Gate) depends on the complexity of the project and on the technical and other risks involved. OV the shelf procurement of an existing product needs less preliminary work than the development of a bespoke design using unproven technology and unconventional management arrangements. Smart Acquisition recommends that a project should spend up to 15% of its planned procurement cost in the assessment phase preceding Main Gate, but the expenditure appropriate to each particular project must be determined in the earlier concept studies. Most of the MoD’s major projects now in the assessment phase plan to spend about 5% of their planned procurement cost in that phase, though one plans to spend about 15% and a few plan to spend only a few per cent. Half of the major projects which have passed Main Gate in the past few years spent less that 2% in the assessment phase (and the Support Vehicle spent 0% by omitting that phase entirely); the others spent varying amounts up to about 15% (the notoriously-troubled Bowman project required a protracted assessment phase in which it spent over 16%). Some of the projects which spent less than 2% in their assessment phases have already incurred significant cost overruns and/or timescale delays (up to 10% and two years relative to their recently-approved budgets and schedules) suggesting that their assessment expenditure was insuYcient and that this aspect of Smart Acquisition is not yet being fully implemented.
Accurate forecasting Accurate forecasting of project cost and timescale has been desirable since Biblical times to permit judicious project selection, realistic budgeting and eYcient project management. Accurate forecasts are also necessary for planning incremental acquisition and for trading oV project performance, cost and timescale to obtain best value for money. But it has always been diYcult to generate accurate forecasts for large, ambitious defence projects incorporating leading-edge technology (and equally diYcult for civil projects with similar scale and innovation) where both customers and suppliers may be prone to mutually-reinforcing optimism. Accurate forecasts are best generated by a group which is independent of both the MoD customer and the industrial supplier, which has expertise in all the technologies and activities involved, which can exploit eVectively the appropriate models and databases, which is large enough to provide critical mass, and which has scope for preparatory analysis as well as customer-driven tasks. MoD must ensure that its policies (on organisation, recruitment and career management) can sustain an eVective forecasting group with these characteristics. The average cost overrun on major projects has actually increased in recent years (from £112 million in 1998 to £250 million in 2003) though most of that increase can be attributed to Legacy projects approved before Smart Acquisition was instituted. However the dozen major projects approved since Smart Acquisition have already accumulated a total of £400 million cost overrun and 61 months of delay since approval, so there is clearly still scope for improvement in the accuracy of MoD forecasting.
New to MoD, but are they Really Smart?
Reorganisation The Smart Acquisition Initiatives included several high-level reorganisations to establish clear customer focus within MoD headquarters, to create a Defence Procurement Agency having formal customer-supplier relationships with its Service customers, to merge the three Service support branches to form the Defence Logistics Organisation, and to institute a Public-Private Partnership (PPP) for most of the government defence research establishments (formerly in DERA). These reorganisations have all been implemented, though the post-SDR debate (fully described in earlier HCDC reports) over the PPP for defence research was protracted and acrimonious. The full eVects of these Initiatives will only emerge after several years.
The CADMID cycle The new Concept, Assessment, Demonstration, Manufacture, In-service and Disposal (CADMID) cycle for project acquisition management has only two approval points, called Initial Gate and Main Gate following the Concept and Assessment phases respectively, whereas the previous Downey cycle has at least four. By eliminating the delays associated with successive approvals, the new cycle should (other things Ev 110 Defence Procurement: Evidence
being equal) reduce the time taken for projects to progress from concept to entry into service. However, since Main Gate approval comes earlier in the project cycle than the final Downey approval (just before manufacturing), the cost and timescale forecasts at Main Gate must be based on less-complete information and may therefore be less accurate.
Partnering Partnering arrangements between MoD and its suppliers were recommended by Smart Acquisition to replace the taut, adversarial relationships with industry which were inaugurated in the 1980s by Mr Peter (later Lord) Levene while he was Chief of Defence Procurement. The Partnering Initiative recognises that when customer and supplier are committed together for decades on a defence project, in which success is very important to both parties, their relationship should not be governed by the rules of the bazaar. An ideal partnering arrangement involves mutual trust and cooperation, with shared information and gain-sharing contracts. When this Initiative was announced, some prime contractors aspired to become MoD’s trusted partner in the derivation of user and system requirements, and to be recognised as its preferred supplier of some classes of equipment. However, as long as MoD retains competition as the cornerstone of its procurement strategy, partnering arrangements on a project cannot generally begin until a supplier has been selected and must conclude at the end of the contract. This less-ambitious partnering on a project-by-project basis can still be very beneficial, even though the customer and supplier inevitably have some divergent goals, but it requires both MoD and industry to overcome their traditional prejudices and antipathies.
Integrated Project Teams Partnering should be promoted by the creation for major projects, and for groups of similar minor projects, of Integrated Project Teams (IPT) incorporating all the project stakeholders from Service customers through the various MoD specialist branches to the industrial suppliers. Each IPT should be empowered to manage the project throughout its life cycle (to encourage a through-life approach) and achieve agreed performance, cost and timescale targets without being constrained by a hierarchical bureaucracy. In practice not all of the IPT could be provided with staV having all of the required knowledge and skills, many staV have been reluctant to relocate when the project transfers from DPA to DLO, and the independence of an IPT Leader is inevitably constrained by the need to take account of the project’s interdependence (in a modern networked battle-space) with other equipment projects, both contemporary and legacy. Furthermore Ministers and senior oYcials, who may have to defend the Leader’s decisions in public, are bound to take a close interest in (and occasionally overrule) any of those decisions with political, diplomatic or industrial consequences beyond the Leader’s immediate responsibility
Capability-based approach This approach to acquisition requires that the Service user’s need should be expressed in terms of the required enhancement of military capability, without any preconception about the class of equipment which might provide it. In particular this approach precludes the assumption that an existing and obsolete design should be replaced by a modern design of the same class. In former times such assumptions were often tacitly justified by the logic that withdrawal from service of, for example, an obsolete class of submarines tended to leave a multi-dimensional gap in the capabilities of UK forces which was inevitably submarine-shaped, and so could best be filled by a new class of submarines. However that logic has become unreliable in an era characterised by rapidly-advancing technology and by dramatic changes in the threat to the UK and its interests. The capability-based approach requires a rigorous and comprehensive definition of the capability enhancement required and a comparative review in the Concept phase of a varied range of alternative equipment concepts. For this review the MoD needs access to expert advice on all of the technologies associated with each concept. This seems incompatible with MoD’s decision to reduce its defence research budget substantially over the past decade, just as the Revolution in Military AVairs is driving a transformation in warfare. In some cases the capability-based approach may identify an innovative concept which is significantly more cost eVective than that which MoD had originally preferred. In such cases the cost saving would far exceed the cost of the concept studies. However in most cases the capability-based concept studies merely confirm the original preference of the MoD staV responsible, and thus serve only to introduce additional time and cost into the acquisition process (thereby worsening one of the problems Smart Acquisition was supposed to alleviate).
Personal incentives Smart Acquisition recommended that MoD’s acquisition process would operate better if its personnel could benefit from personal incentives. Incentives (such as ransom, prize money and plunder) were an accepted part of military operations in former times, but these practices have been recognised as damaging to operational eYciency and have therefore been terminated. Incentives remain common in commercial aVairs and work best where the advantages from an individual’s eVort can be identified promptly and Defence Procurement: Evidence Ev 111
unambiguously. However in defence projects which extend over several decades it is diYcult to devise an incentive scheme which would not distort the priorities of acquisition personnel towards immediate (and possibly spurious?) achievements which attract reward and away from the longer-term benefit of the project. At worst, incentives might discourage realism in favour of rose-tinted assessments of the project’s progress. MoD has compounded the likely damage from incentives by adopting an unpopular scheme whereby each year half of a Team receives a bonus while the remainder does not. Under this scheme an oYcial who gives a colleague good advice or assistance and thereby increases the colleague’s chance of a bonus correspondingly reduces his own prospects (unless he demands some sort of receipt?). This hardly promotes eVective teamwork.
Conclusion Smart Acquisition was originally presented as a wondrous revelation whereby all of the perceived problems in MoD’s organisation and processes would be eliminated, or at least drastically reduced. But it is now increasingly perceived as the start of a long struggle by MoD and its suppliers to attain greater eYciency and to avoid costly errors. Although most of the stream of bad news over the last few years can be blamed on Legacy projects, it is disappointing that these projects do not appear to have obtained much benefit from the Smart reforms. It is equally disappointing that some projects which recently passed Main Gate, and which should have incorporated Smart principles, have already encountered unexpected diYculties just as their predecessors did. It must be expected that in any programme of many high- technology projects a few will proceed less well than expected (and some will go better) but the number of Smart projects which are already in diYculties suggests that the Smart culture changes in government and industry have not yet been accomplished. If MoD were to assess the eVectiveness of Smart Acquisition in delivering “Faster, Cheaper, Better” defence equipment (and it certainly should make this assessment), it would probably discover that some IPT and support groups have raised their game more eVectively than others. Since some MoD oYcials are today describing their problems in language which is virtually the same as was used in the SDR, it is evident that the transformation which Smart Acquisition hoped to deliver is still incomplete. Dr David L I Kirkpatrick Professor of Defence Analysis April 2004
Memorandum by The Defence Industries Council Introduction Industry welcomed the launch of the Government’s Defence Industrial Policy in October 2002. The Secretary of State for Defence and the Secretary of State for Trade and Industry, in their joint announcement of the new Policy, oVered the prospect of a more coherent approach in decisions about Defence that aVect industry in the UK. It remains the objective of industry to co-operate fully with Government Departments to find ways to implement the Policy as eVectively as possible.
What Did Industry want Defence Industrial Policy to do? 2. HMG consulted industry in drawing up the Policy and industry presented a clear view on what was needed. Industry noted that most Governments, particularly the USA and France, have a comprehensive approach of supporting their national industries in order to protect their sovereignty. Though it has a strong policy to keep the UK market open and competitive, the UK lacks an overall industrial policy framework. The result is that the UK has lost industrial capability. Industry does not argue for a closed market but submitted that if this trend continued the UK would lose almost totally the strong industrial base that has supplied our Armed Forces in the past, and UK sovereignty would be threatened. 3. Industry argued that this loss would have serious consequences: — for our security of supply and support for crisis situations; — for investment and employment in a major high-tech industry; — for the balance of payments, particularly visible trade; — for the prosperity of regions in the defence supply chain. Industry felt that urgent action was required to avoid these consequences. 4. The action industry sought was for Government: — to establish a clear policy lead in Whitehall, a forum for all interested Departments to discuss policy and practice with industry and the issue of an annual statement on defence industrial capability; Ev 112 Defence Procurement: Evidence
— to assess the impact of procurements and R&T investment on defence industrial capability under clear policy guidelines; — to examine critically how “value for money” as a concept was defined and used in practice; — to maintain suYcient investment in research and technology for the long-term in strategic areas the market will not provide; — to give Industry a clearer picture of the capability the Armed Forces need and how much money is available; — to implement Smart Acquisition with a clear strategy for industry; with industry involved in procurement from the concept phase and suYcient spent up front to reduce technical risk and delay before Main Gate approval is secured; — to be more robust in tackling market barriers in other countries; — to ensure that the Government processes that aVect exporters should be as eYcient and eVective as in competitor nations.
What has been Done?
5. Defence Industrial Policy has certainly intensified the dialogue between HMG and industry about the economic implications of defence. The dialogue has been split into manageable and comprehensible areas of work as described in Appendix A.
What Still Needs to be Done
6. Industry believes that Defence Industrial Policy is an essential component of ensuring that the UK will, in future, have modern, well-equipped Armed Forces and an innovative, high technology industry. Whilst the establishment of the Policy was welcome, the achievement to date has been modest. It is hard to point to examples of positive application of the Policy, and decisions could still be taken that would run counter to any coherent framework on industrial capability. 7. Industry therefore believes both MoD and DTI should continue to develop and progressively implement the Policy in close consultation with industry and other interested Government departments. There is a need for a clear analysis of the capability needed in the longer-term and for goals and milestones to be achieved.
Key Issues to be Addressed
1. Government must identify the defence industrial base it wants to see flourish in the UK in future and develop strategies accordingly. 2. The strategies should be incorporated into the processes for taking decisions on procurements through measurable criteria. 3. HMG should match its R&T spending to its capability requirements, focus it in the high priority areas and sustain it despite short-term pressures. 4. MoD should provide more information to industry on its capability requirements and the level of spending planned in each area, and be open about where it will not invest. 5. Industry should be more involved in the development of capability requirements, including the evolution of Network Enabled Capability and the new initiatives in European security. 6. Where HMG decides to buy capability from overseas, it should ensure that its sovereignty is safeguarded by obtaining the necessary rights and technology release to support and update the systems concerned throughout their operating life. 7. HMG and industry should work together to improve access to key developed world markets, the eYciency of international co-operation and to ensure market conditions in the UK are competitive with other nations. April 2004 Defence Procurement: Evidence Ev 113
APPENDIX A
Progress to Date on Defence Industrial Policy Work Streams
Structure and Strategy 1. A structure has been put in place for HMG and industry to work together through the NDIC and Cabinet OYce. But if the Policy is to be eVective HMG must introduce a strategy for implementation and processes that require all the players in the relevant decision-making positions to understand and co- ordinate their roles. Industry welcomed early moves by the MoD to issue guidance about what should be done to implement the Policy, but the evidence, albeit mostly anecdotal, is that in 2003 implementation was patchy, and the level of understanding across MoD of what the Policy meant in practice was low. More recent indications are that the MoD and DTI are making a more determined eVort to implement the Policy, and are engaging industry more, mostly at a company level, to that end, but it is still early days.
Database 2. It was clear in the discussions that led to the announcement in October 2002 that HMG did not have good enough information on the UK industry with which to make a sound assessment of economic/ industrial factors in casework. This is particularly true of the supply chain below prime contractor level. Broadly most cases would be assessed on the inputs made by industry to support their own submissions and bids for work. The ability of MoD to be an intelligent customer and make independent judgments on these submissions had been seriously reduced. HMG took a key decision in the October 2002 announcement in deciding that UK industry should be defined as all those businesses with a significant industrial base in the UK, regardless of nationality of ownership. A joint DIP workstream produced an initial database model and MoD is now collecting a lot more data from many of the companies concerned and by this means seems to be strengthening its information base. How it will seek to use this information in its decision-making remains to be seen. The Government ownership of this database, access to industry and development of its use on behalf of UK industry such as by DESO and as an index of UK defence company capabilities are still to be finalised although we understand the DPA intends to develop this further.
Research and Technology 3. One of the prime reasons why industry saw the need for a Defence Industrial Policy was the sharp decline in the technology used by the UK Armed Forces that was supplied from UK sources. There is a complex set of issues here, including the ability to transfer technology from those countries, the US mainly, who export defence equipment and services to the UK. Industry recognises that HMG has listened to industry’s case, for example in the discussions about implementation of the Aerospace Innovation and Growth Team, and is trying to be positive in its response. But there remains a high risk that spending on R&T to support future defence requirements will be sacrificed to deal with short-term budgetary problems or technical aspects with existing systems that should properly be part of programme spend.
Capability 4. A key part of the debate over Defence Industrial Policy is how MoD turns its analysis of future military capability into specific requirements for industry to address, and the role that companies can play in this process. This is properly a part of the dialogue about the acquisition process, but it also links very closely to the discussion about identifying the industrial base needed for the future. If industry in the UK is to focus on the right areas of investment to support the future requirements of the Armed Forces, then it needs to have the earliest possible indication of the priority areas on which MoD is going to concentrate its own spending on capability and technology development. The emergence of Network Enabled Capability underlines this need if an overall systems approach is to emerge. Capability is an area in which dialogue between MoD and industry has been extensive over the last year, and one in which industry is hopeful MoD will take a positive initiative this year, but it has not emerged yet. This will involve some very hard choices and the MoD must make it clear where it intends to invest and where it does not, taking into account where UK industry is world class or near to it and thus able to win business from other markets.
Acquisition 5. Industry played an important role in the development of Smart Acquisition over the years since 1998 and continues to invest significant resources in trying to ensure that it is implemented eVectively. Industry sees a direct relationship between the implementation of Smart Acquisition and Defence Industrial Policy and has therefore sought to combine the two in its dialogue with MoD. Some key areas have emerged as the focus of debate: — Capability: industry involvement in development of requirements as mentioned above; Ev 114 Defence Procurement: Evidence
—EVective Project Management: improving the way MoD and industry jointly manage, in particular, large and complex programmes; — Through Life Management: understanding and implementing the full cost implications of new systems from the early stages. Behind these areas dialogue is also developing on three underpinning questions: — Competition and partnering: providing good practice for doing business in a commercial environment consistent with Defence Industrial Policy; — Information sharing: developing the infrastructure needed to undertake international defence business in the information age; — People and skills: ensuring that the defence community will have the skilled people to achieve what is proposed in acquisition plans (see below). This work is increasingly focussed on critical issues that need to be tackled if MoD and industry are to work together constructively to build on Smart Acquisition. Management of risk and spending enough money up front to reduce technical risk to acceptable levels is one. Agreement on the handling of intellectual property rights in projects where funding is shared is another. There is evidence that MoD wants to tackle these issues constructively with industry but the delivery of improvements is slow.
Market Access 6. Industry believes that having the degree of access to other markets that foreign suppliers normally have to the UK market must be a key goal of Defence Industrial Policy, and that was broadly accepted in the 2002 launch. A Defence Exports and Market Access Forum has been set up, principally for HMG and industry to discuss: — The contribution that defence exports make to the UK economy; — Increasing co-operation between the UK and US industry; — Developing a European defence equipment market; — The competitiveness and openness of market conditions in the UK as against other defence supplying nations. This is a critical area of the Policy and the degree of success achieved will have considerable implications on all the other aspects. Key areas such as the US ITAR waiver and the new European Defence Agency are the focus of current work but no breakthroughs have been achieved yet. Meanwhile industry has been concerned over the imminent introduction of complex new export control legislation, and the prospect of ECGD’s competitiveness against other credit agencies being eroded by new plans.
Financial Health 7. Industry remains concerned that the way defence acquisition is organised in the UK tends to produce lower returns for business than in countries that are a major competitor to the UK, and that this will undoubtedly have long-term implications for the location of business in the UK. At the same time industry accepts that HMG has reasonable concerns about the eYciency of UK industry in meeting its requirements. Industry recognises the need for further work to be done to consider how these issues can be dealt with in a way that ensures the taxpayer really gets “value for money” defined in a way that takes into account all the implications for the UK of defence spending. It is also important to understand that market forces cannot be relied upon: with a monopsonistic buyer and public accountability dictating that profit margins are “reasonable”, not market based.
People and Skills 8. UK MoD and the defence industry must have access to the skills needed to meet the challenges of the future requirements placed on the Armed Forces. They are not alone in facing the challenge of ensuring a skilled workforce in future, and the response will often be a matter of contributing to national developments on skills supply, as, for example, the aerospace industry is doing through the implementation phase of the Aerospace Innovation and Growth Team. The skills element underpins virtually all the workstreams mentioned above and the Policy should make a positive contribution in this area. April 2004 Defence Procurement: Evidence Ev 115
Memorandum by Intellect
DEFENCE PROCUREMENT
Introduction Intellect represents the interests of the IT, telecommunications and electronics industries in the UK conducting business at all levels of the supply chain. Intellect represents more than 1,000 organisations spanning blue-chip multinationals to early stage technology companies. Intellect members contribute in excess of 10% of UK GDP. Further information can be found at www.intellectuk org Intellect is one of four trade associations that support the Defence Industries Council (DIC), which acts as a focus for interaction with the Government on defence industrial matters. In this paper Intellect aims to diVerentiate and present the views of its members and welcomes this opportunity to address those issues to the House of Commons Defence Committee in preparation for their Procurement Inquiry. Intellect pursues a broad programme of research and analysis, market awareness and influence in information superiority, information operations and associated operational concepts that enable leverage of shared awareness to improve the eYciency of our industry sector.
Information Age Transformation—Defence for the C21 This response concentrates on the third aspect of the Committee’s terms of reference for this inquiry and specifically addresses the Network Enabled Capability (NEC) aspects of MoD’s equipment procurement programme. On Defence Industrial Policy (DIP) and Smart Acquisition more generally Intellect endorses the work currently underway within the Industry/MoD joint structure particularly the Equipment Capability Group and the Commercial Policy Group. The 1998 Strategic Defence Review (SDR) provided a radical analysis of the UK’s security priorities, missions and tasks. As part of this forward-looking strategy the White Paper allocated a high priority to information technology (IT) and its application in Defence. The SDR envisaged a “single battlespace in which maritime, land and air forces will be directed, targeted and supplemented by a new generation of intelligence, surveillance, information and communication systems”. The main themes of Intellect’s response are as follows:
1. UK Defence Environment Intellect is conscious of the demands for improved eYciency, eVectiveness and communications across the defence business and battlespace. Enhanced operational eVectiveness—better IT and communication systems will enable greater strategic and operational agility during times of crisis and greater economy of eVort. The SDR put joint operations firmly at the heart of defence planning in order to deal with increasing complexity and unexpected situations. With the increasing demands of modern joint operations the single service commands need improved information sharing capability during the preparations for, as well as in, action or peacekeeping. HMG needs to be more joined up electronically to enhance decision making; post SDR UK needs to be more joined up in its military operations and, to underpin the Defence Information Strategy that flows from the SDR; preparation for and direction of the battlespace starts in the fixed oYce space and in modernising the MoD. Information management is central to many of the Defence Change Programmes hence the need for an information infrastructure. This represents a significant change initiative within the UK Defence Change Programme. In comparison to the technical delivery it is the management change, business and military process impact and people issues that present the greatest challenge. Changes to the world order and the UK’s defence posture—post September 2001, the War on Terror and Defence White Paper 2003—have necessitated changes in the MoD’s relationship with industry. Notably Defence Industrial Policy, the evolution of Smart Acquisition, the restructuring of the MoD Science and Technology (S&T) portfolio to include outputs relating to technology in the supplier base and DTI’s Innovation initiative. The information age represents a period of rapid change for the UK as a whole, so it follows that Defence will need to adapt to these external changes as well as make its own changes in order to deliver better use of information. As an integral part of these changes Intellect aims to work at establishing a culture that encourages innovative thinking, information and knowledge sharing, collaborative and flexible working arrangements and that, as a consequence, support the development of new ways of working and doing business. Ev 116 Defence Procurement: Evidence
It is essential that we create a UK Defence environment that encourages innovation from the electronics industry. Successful implementation of NEC is dependent on achieving this. NEC must be seen “out of platform” and into embedded systems. This is key to delivery of advanced Information Age capability and underpins NEC and information exploitation in the battlespace. Intellect notes that following the DPA’s “Stocktake” and the emergence of the Information Superiority (IS) cluster both it and the DCSA (as a significant provider of services) are reliant on the capability of this industry sector. We are concerned that MoD’s understanding of how industry works may be being eroded. Industry can help to address MoD’s diYculties in engagement with Commercial-oV-the-Shelf (COTS) capabilities including those special requirements, such as mission and safety critical aspects. Integration is key and whilst MoD’s engagement is good at the Dstl/QinetiQ level it is less so with broader industry.
2. Need More IG Investment
The current process highlights concern about MoD’s approach to Whole Life Cost (WLC) and Sustainability: Initial cost dominates competitions, not value for money (VFM). No incentive to innovate or reduce WLC. Inability to spend to save. MoD’s procurement aspirations are, at times, unrealistic and there is lack of coherency across MoD— ECC/DPA/DLO and a lack of pull through from the research programmes. Consequently Industry’s technology strategy is driven by MoD’s equipment procurement strategy, which generates concern about Industry’s capability sustainment. With long life cycle times the need for demonstrators is crucial. True capability procurement implies closer and sooner involvement with industry. We recognise that Industry also needs to learn that earlier engagement is crucial and that with incremental contracting that not all can be defined up front. Intellect members and individuals from committed defence contractors are currently working with DPA/MoD in think tanks, Councils and working groups addressing these very issues. We consider that this activity is generating significant benefits and seek to encourage such joint work.
3. Increase Technology Funding
The COTS technology (on which much of this capability is founded) moves at a rapid pace and in so doing opens up significant opportunities. The demands of joint operations, whether delivering munitions or medicine, stores or support, requires a more corporate approach to information infrastructure needs. In achieving improvements in information management for the C21 MoD must change its perception from a technology focus, to information infrastructure as a key capability asset and thence an enabler of defence outputs. There is a mismatch between the timescales of traditional defence equipments, measured in years for development and service life, and those of components and information technology, in the broadest sense, which are driven by the civil market and are measured in months. This implies a significant challenge of managing technology obsolescence in much defence equipment. It also has significant implications for the acquisition of defence IT systems and for the integration of traditional military systems into an NEC environment. There is also concern that the adoption of diVerent standards by MoD from those used by the civil sector and overseas customers for defence equipment, particularly the USA, drives up cost, impedes competitiveness and inhibits the use of COTS. Technology is the enabler not the rationale. Capability is delivered by the combination of people, processes and equipment. So the delivery of a single technology solution will not result in the MoD becoming knowledge experts. It will be by intercepting the current processes and ensuring staVs are trained to use the new systems that the benefits of this corporate endeavour will be realised. Many systems are now due for update and so there is an investment opportunity to adopt a more corporate approach to information. Intellect recognise the 10:1 (or worse) funding disparity in research spending between the USA and the UK, we believe that this is likely to become most apparent in the area of NEC. For electronic materials and devices the increasing R&D expenditure in the USA through the DoD is leading to the development of state- of-the-art technologies that are not available to European industry at the component level. Examples include the present availability of high power GaAs microwave devices, and much wideband gap device technology. Defence Procurement: Evidence Ev 117
4. Mechanisms to Achieve Capability Insertion and Pull-through Is the current MoD Enterprise:—its processes and its organisational structure adequate to deliver the integrated “systems of systems” approach essential for NEC? The need for a collaborative approach between Military and Industry has never been greater. However there appears to be no overall vision, architecture or plan. NEC must be treated as an overall System of Systems that sits hierarchically above all other systems. We believe that there is a need to manage contracts in a more coherent way. This means contracting with new commercial arrangements. Another facet of change is the shifting balance of risk that obtains through increased reliance on ever more sophisticated information capabilities to support our operational and business processes. Striking an informed balance between process improvement and the potential vulnerabilities created will be a key task for Industry and MoD to achieve. As Industry is to be required to bring innovation (including that sourced from SMEs) what can MoD best contribute? Intellect contends that this should be programme innovation. A 15% “innovation fund” subject to a degree of accountability. Such contracts should be let in two elements; first delivery of a capability and then a more flexible element say 15% contract value to identify innovation. Perhaps there should be a mandatory percentage of contract value allocated to innovative companies? In any event both core manufacturers and SMEs should be engaged in the search for novel ideas. The measure of eVectiveness to be speed of delivery to the end customer. MoD’s discomfort about managing risk is being addressed as it endeavours to become a much more intelligent customer. We assess that Industry is better equipped to make a description of the risk—an LSI being required to show innovation management capability. If MoD is to act as a Prime does it make for low risk? The Defence Science & Technology Laboratories (Dstl) acting as innovation manager for Integrated Project Teams (IPTs). Not all requirement creep is bad but there is clearly a need to manage this. Until these behavioural and cultural changes are apparent things will not change fast enough. Much of the management of ongoing change/requirement creep is vested in commercial/business management and requires staV with appropriate skills to do this. This applies to both MoD and Industry, but Industry seems to be able to achieve these changes much faster, MoD must be able to learn equally as quickly. How can Industry and MoD jointly learn? Firstly that during contract negotiation whilst industry can be innovative it cannot take all the risk. Further education is necessary. Within the software element of NEC changed working practices are inevitable (ongoing education) and how to capture this experience when staV move on or the going gets tough (eg on the first EP round) needs to be thought through. How is staV expertise to be measured? The current metrics are not aligned with the demands of Incremental Acquisition.
5. Benefits:Responsive Supply Chain—Economic Benefit—NEC Realisation Intellect contends that the question “What is the cost of integration for realisation of NEC?” is indicative of the wrong approach. UK needs networks that deliver and software to move information. Intellect’s Industry sector can inject a diVerent commercial approach to NEC realisation embracing hardware- information and do it at a diVerent rate. Some aspects need to be worked through. First are the benefits— speed of response and innovation. Second some work in progress—why industry has diYculties with MoD and capabilities not specifically defined for the UK MoD market. The “stoppers” include integration of the management of innovation and policing which imposes obstacles (accreditation/security controls et al). The need for military tailoring is obvious; the military has diVerent uses for equipment and special requirements will be inevitable albeit they may pose diYculties for COTS. The way to address this is to bring these aspects to the fore earlier and decide—with Customer 2—what risk associated with new ideas is taken into the core programme. In terms of output the benefits are: sustainment of UK industrial capability and capacity, acquisition agility and responsiveness and more eVective use of technology. Intellect seeks a properly managed transformation process applied across industry to make sure it happens. This will demand excellent governance to ensure it all happens fairly, with integrity and harmoniously and as UK Plc.
6. Key Recommendations — Establish a culture that encourages innovative thinking, information and knowledge sharing, collaborative and flexible working arrangements and that, as a consequence, support the development of new ways of working and doing business. This will aid development of a UK Defence environment that encourages innovation from the electronics industry. — A 15% “innovation fund” subject to a degree of accountability. Such contracts should be let in two elements; first delivery of a capability and then a more flexible element say 15% contract value to identify innovation. Ev 118 Defence Procurement: Evidence
— Rapid recognition that the IS areas within MoD (DECs, DPA, DCSA etc) are fundamentally diVerent to the platform areas, and that this is the area that can deliver against the NEC requirement. — This recognition then needs to activate enthusiastically continued partnering cultures, open behaviour patterns and much closer working with this industry sector. Intellect might play a role in filling the gap created by competition within industry, and providing a means for MoD and Industry to come together in a manner beneficial for all. Individual contractors will already be attempting this, for obvious reasons. We believe that the nontraditional defence companies and SMEs need to be included in these initiatives. — Recognition that personnel within this area require to be at the forefront of this “new” way of working. Education, skills updates etc need to be given priority. April 2004
Memorandum by QinetiQ Group plc
Summary 1. The development of coalition-based warfare poses fresh challenges to the UK procurement process. 2. Defence procurement is risky. 3. UK government mechanisms lead the MoD to buy US technologies. 4. The UK has competitive technology which remains unused. 5. US policy has responded to the new scenario with more flexible processes. 6. The UK has the opportunity to learn the same lessons.
Evidence
1. The development of coalition-based warfare poses fresh challenges to the UK procurement process 1.1 From the formation of NATO until the end of the Cold War, one assumption behind UK procurement policy was that in any theatre of conflict, UK forces would be operating alongside fellow- members of an alliance. It stemmed from this that if UK equipment and systems were interoperable with those of fellow-allies, interoperability in battle would follow. Since the 1991 Gulf War, and most recently with the war in Iraq, this assumption has been called into question. 1.2 UK forces may now find themselves fighting alongside those of nations with whom we have not previously co-operated and whose systems are wholly alien to us, and equally we may not be able to rely on some of our allies for military co-operation in every theatre, or indeed for reliable supply of material. Above all, the move to coalition-based warfare requires equipment and systems used by UK forces to be more versatile, and more capable of integration at short notice with unfamiliar counterparts. 1.3 The development of coalition warfare also highlights and exacerbates diYculties already experienced with the security and responsiveness of the MoD’s supply base. The UK learned during the 1991 Gulf War that it could not automatically rely on fellow NATO members to fulfil orders for the battlefield. UK industry still makes a point of stretching itself to make sure UORs are met, but it is an open question whether an overseas supplier will, particularly if their government is not involved in the coalition pertaining at the time. 1.4 Furthermore the very unpredictability of the modern security scenario leads to further challenge to traditional procurement processes. While technology remains a powerful tool for prosecuting military and security objectives, it is no longer possible to predict with any certainty the requirement 15 or 20 years hence, which is the lead time of most major procurements today. This ought to lead us to a quite diVerent evolutionary based procurement strategy. Fortunately such a strategy would also be better in economic, industrial and technology terms as well.
2. Defence procurement is risky 2.1 Whichever country or company first takes on the development of a new technology tackles issues which by definition cannot be wholly known in advance. Thus across a range of new technology developments some, probably the majority, will prove harder than expected. The diYculties of breaking new ground in technology is not just a defence phenomenon, it is equally true in other civilian markets. This is why in the civil and commercial worlds companies seek to manage their exposure by balancing the amount that is genuinely new in a project with reuse of platforms or systems that are proven. Incremental development is a proven technique for risk management. Government processes for defence procurement mitigate against such measures. Defence Procurement: Evidence Ev 119
3. UK government mechanisms lead the MoD to buy US technologies 3.1 UK MoD has a planning process based on costed long term plans. The launch of new programmes which are likely to absorb significant resources in the future are quite rightly subject to considerable scrutiny. A consequence is that the Forces see each programme as a watershed opportunity to achieve advances in equipment, and this results in pressure for ambitious requirements. Conversely budget pressure squeezes the available resources while industrial pressure presses for commitment to contract. All these factors create the opportunity for an unconscious “conspiracy of optimism” which launches projects with too ambitious a specification, too little resources, too short a timescale, and too little established technology. The DPA gets passed this challenging task while being all too conscious of the trouble that the NAO and PAC are likely to give them personally should the project fail to deliver. They have just two principal lines of defence—they can run a taut competition (which allows them to say their defaulting contractor was the best that was available), and they can select proven equipment (which in practice means buying US).
4. The UK has competitive technology which remains unused 4.1 Contrary to the received wisdom that US defence technology is far ahead of anything from elsewhere in the world, there are many areas of technology where the UK has in its laboratories proven technology at least as good as, and sometimes ahead of, anything available oV the shelf from the US. In the last technology assessment survey done by DERA, before it was split into QinetiQ and OstI, out of 92 technologies surveyed, 20% were assessed as world class and 46% as the best in Europe. However, when it comes to procurement it is now a rarity for a new defence programme to be based on UK technology. As these programmes unwind so this issue will become more marked. 4.2 The explanation for this dichotomy between technology on the lab bench and deployed systems is that the US has more mechanisms and a greater propensity to take research to demonstration. The UK has no real equivalent of DARPA, nor any procurement concept as significant as ACTDs. Thus when the time comes to select a technology to integrate into a system the choice often comes down to backing a promising UK technology which can meet the full requirement but has yet to be delivered, or, buying a near-oV-the- shelf US equipment which will be less expensive (because of longer production runs) and lower initial risk.
5. US policy has responded to the new scenario with more flexible processes 5.1 Despite the vastly diVerent scale of resources the US DoD also has diYculties with cost over-runs, defaulting contractors, and over ambitious projects. It went through a similar phase in believing that competitively let prime contracts against an output specified were the answer. It nearly crippled US industry with that approach without achieving faster or less costly equipments. It then decided a more sophisticated approach of risk sharing and Integrated Project Teams were a superior approach. More recently it has been introducing still more flexibility into its processes through greater use of competitively placed IDIQ (indefinite deliverable, indefinite quantity) contracts which permit the customer to buy as required from a limited selection of suppliers. In parallel the major new equipment contracts are assuming less prominence (witness the cancellation of Comanche and Crusader) while existing equipment is being extended in service and updated flexibly in response to front line demand using the IDIQ contractual instruments.
6. The UK has the opportunity to learn the same lessons 6.1 There is a vicious circle into which UK defence procurement could slip. Budget pressures from overrunning procurements force the DPA to skimp on the technology maturation projects that numerous worthy reports have indicated essential to de-risking procurement. New projects get harder to start because of the same pressures. With fewer programmes and more delays the requirement step between one programme and another becomes greater. DPA chooses more oV-shore technology to mitigate its risk. UK industry capability weakens as a consequence and subsequent procurements become more hazardous and subject to failure. Which further puts pressure on budgets, thus completing the vicious circle. 6.2 This chain of events is not inevitable. Small nations such as Sweden have shown how budgets significantly smaller than the UK can be applied to develop indigenous fighter aircraft, warships, submarines, weapons and fighting vehicles. The policies that will lead to superior performance are not new or revolutionary and have been articulated in successive reports, including the work by McKinsey which led to the Smart Procurement initiative. The three most important policies to drive through are: — To invest in long life architectures into which successive generations of equipment can be integrated and which are configured with flexible interoperability from the start. — To invest in maturing equipment technology in advance of requirement so that it is integration ready for rapid deployment when the requirement arises. — To create an appropriate balance between competition and cross-project collaboration in which the DPA, on behalf of the end customer, plays a full and richer, more strategic role in achieving not only a successful project but also the encouragement of a vibrant competitive industrial infrastructure able to rapidly respond to future requirements. Ev 120 Defence Procurement: Evidence
6.3 Although none of this recipe is new, very little has been implemented in full because of the cost of transiting from the current state to the desired one. Unless more resources can be found (presumably highly unlikely) as with any major industrial restructuring project the first steps have more pain than benefit, and therefore are usually only implemented once a watershed has been reached. The cost of thorough reform of defence procurement is likely to be slower delivery of capability to the front line in the first instance, but the benefit will be felt in superior equipment better suited to the evolving tasks for generations to come. QinetiQ is one of the world’s largest R&D organisations, with 9,100 employees, over 7,000 of them scientists, at locations throughout the UK. Formed out of the Defence Evaluation and Research Agency (DERA) and now operating in the market place, QinetiQ has a heritage of over 60 years of pioneering defence research, and is taking forward in the commercial sector world-leading capabilities both as an innovator and an evaluator of defence technologies. April 2004
Memorandum by Northern Defence Industries Ltd
Introduction Northern Defence Industries Ltd (NDI) is a not-for-profit company of some 170 companies operating in defence and aerospace supply chains, mainly located in the north east of England, Yorkshire & The Humber. Unlike most other clusters it is interested in all the defence operational environments- land, sea, air and space. NDI is a business services company that matches supplier capability with the procurement requirements of the global defence and aerospace industry. Its principal roles are to provide business opportunities, intelligence and supply chain services to its members. It creates partnerships with prime contractors such as Raytheon, SAAB Bofors Dynamics, Lockheed Martin, BAE Systems, Thales, United Defense, Boeing, Avis Vickers and Maersk. It recently led a group of SME’s on a visit to South Africa where it worked with BAE Systems to identify opportunities to do business under BAE’s “oVset” obligations. It will support ten SME’s at the Farnborough International exhibition and exhibits at DSEI. Its current projects include NLAW; Javelin; CVF; MK45 naval gun; Watchkeeper; FRES; FCLV, FCSV and MARS. Its funding comes from the private sector, regional development agencies and the EU. It collaborates with representative trade bodies such as SBAC; DMA.and SMI; as well as the DDA; DPA; DLO; DESO and DTI to advance the business interest of its members.
Key Projects NDI has a keen interest in CVF. It arranged for both BAE Systems and Thales to present to the region and through newspaper campaigning stimulated some 200 small companies in the north to register as potential suppliers. NDI recognises that there is a requirement in coming years for some 600,000 tonnes of naval shipping. It is also keenly aware that the timing of programmes does not appear to have been co-ordinated. The various project teams seem to suVer from what has been called stove-piping. The result is that there is at the moment a concentration of the construction phase of major projects at the back end of the decade (eg CVF, MARS, JCTS) while the middle years may experience a dearth of orders. No business can carry the costs of several years of empty order books even though the workforces and their capabilities represent a strategic national asset which will be necessary to meet requirements and in-service dates. The UK- and in particular the shipbuilding industry-has in the past suVered a lack of long-term investment in equipment, technology and a skilled workforce. Such short-termism must be an inevitable consequence of companies with excess capacity and wafer thin profit margins. Capabilities shed now will be sorely needed in the future, and cannot be recreated rapidly, not least because employees laid oV retire or get new jobs out of their trade. Young people observe the cyclical nature of the industry, and even in the declining number of instances where training places are available, are not motivated to enter the industry. The MARS project is important to rectify the eternal ravages of seawater; to improve capability; and to enable the UK to scrap its single hulled supply vessels. It represents a major manufacturing challenge with up to 10 hulls. However it seems to be beset by indecision, best illustrated by earlier talk that “we mustn’t solutioneer” when discussing whether airships or ships were the way forward! It seems inconceivable that the project will emerge unscathed from financial review, and yet it represents an eVective way to replenish order books. Treasury investment to bring forward some parts of the requirement either by new build or conversion could yield operational savings by expensive to run ships being taken out of service early, as well as enabling the UK to meet its environmental commitments. FRES similarly seems to be suVering “paralysis by analysis”. Defence Procurement: Evidence Ev 121
In our region Alvis Vickers could be said to be on an order drip-feed and as a consequence its supply chain is less able to make the investment decisions that are required to ensure it can buy cost competitive, technically acceptable components from the UK industrial base in the future when they are required. Major projects such as those mentioned and others represent real opportunities for our members and others, but there are lessons from NDI experience on the successful bid teams for NLAW and Javelin. In both of these the prime contractors set cost and technical targets for the NDI supply chain to meet. They didn’t indulge in wasteful and time-consuming competitions to drive down the sticker price at the expense of industry’s overall costs and they created an atmosphere of trust with the supply chain which carries over into innovation to meet mutual goals because the interdependence of the whole supply team is recognised.
Implementing Defence Industrial Policy It is worth observing that the MoD spends some £12 billion a year on goods and services, while the sponsoring ministry for the defence industry, the DTI, has a budget for supporting industry of only around £750 million. There is a clear disconnect. If Government were to recognise that its Defence Industrial Policy should be extended to encompass the concept of nurturing the capabilities the MoD is going to require to fulfil its future needs, this would be helpful. There is a feeling abroad in the industry that DIP requires more substance to the political direction of ministers. MoD seems to take the view that its spending power cannot be used to support economic development and that competition is important. This argument does not sit well with the tax payer or owner managers of industry who observe and are the victims of the attrition that is obvious in the domestic manufacturing and engineering industry. Arguably MoD policy is responsible for the lack of competition because it does not engage directly with larger SME’s and system integrators who can provide viable competitive solutions just as they do, for example, in the automotive, oil and gas and electronics industries. There seems at present to be little evidence that the DIP is pushing defence spending though to the real economy or indeed that the MoD’s discretionary expenditure could be seen as a form of regional development, which is not constrained by EU rules. There is a constant concern that prime contractors, because of the nature of their vertical integration, will seek to use their own assets first. The Boeing divestiture of component plants in the US (some to GKN) might represent a potential change in the business MoDel, as does BAE Systems’ statements that they see themselves as a systems house not as a “metal-basher”. Metal-bashers would feel more comfortable doing business in such a world. External SME sub-contractors will be reluctant to inject their innovation where there is no genuine partnership because they will fear for the protection of their intellectual property. The composition of the NDIC as a “big boys club” does little to help the SME community. The one non- major company members’ remit is unclear and no communications mechanism exists for SMEs to a body which seems increasingly to be THE main conduit for MoD consultation with industry. The full impact of the DPA Supplier Relations Group has yet to be felt at lower levels of the defence supply chain. As far as we can observe, the DIP doesn’t really recognise the time and cash costs of sustaining a business in the peculiar environment that is defence procurement. The greatest constraint is the time bidding takes both in bid preparation and the long lead time before orders are placed and fulfilled. During that timescale there is a real risk that capability can disappear. If an SME can stay the course—a diYcult proposition at present—the reward lies in a long period of supply. If this includes through-life sustainment, it can be a useful underpinning of an SME business plan. There is however a cultural point that the MoD does not always recognise; that the SME community is not like the primes. They have no deep pockets and they represent a present capability not necessarily a future intention. Export opportunities would be very welcome to SMEs, but the focus of DESO is principally on prime contractors. SME opportunities may be traded away to secure contracts—analogous to our own policy of oVset obligations. However, the £2.4 billion of unfulfilled obligations makes some wonder whether the IP programmes have the necessary teeth. There is a clear view that the primes look after their own interests—which is only to be expected of course. But who will protect the weakest, the SME’s? Government policy measures do not always recognise realities. The ability for SMES to charge interest on overdue accounts sounds attractive—but SMEs fear the impact on client relationships of demanding it. And pre-printed prime contractor terms and conditions leave little scope for negotiation! Another example is the Aerospace Innovation & Growth Team. Successive chairs, by the nature of their backgrounds, are likely to be more marginal in their understanding of the nature of SME innovation and growth. Bureaucracy and shortage of risk financing are likely to be key issues for them. Perhaps MoD prime contractors should be required to account for their stewardship of SME supply chains in a form of MoD corporate and social responsibility. Ev 122 Defence Procurement: Evidence
Smart Acquisition Better, faster, cheaper. A majority of the capability in a fraction of the time. Incremental acquisition. We see scant evidence of it so far. The response of industry to Operation Telic UOR’s should be noted as a learning point. £500 million was spent quickly and eVectively with no complaints that industry was profiteering or cutting comers that would endanger the capabilities being procured. In such circumstances the great value of genuine partnerships is demonstrated. We would be happy to provide any information that would be helpful to your deliberations. David Bowles Managing Director April 2004
Memorandum by the VT Group VT Group is an international government services provider. The group is divided into two business units, Support services and Shipbuilding. Together these activities employ around 10,000 people VT Support services comprises activities in both the military and public sectors and now accounts for over two-thirds of group turnover. Military support is tri-service and includes training, platform and equipment maintenance, and facilities management, while services for the public sector focus on training and education, careers guidance, and secure communications. VT Shipbuilding designs and builds a wide range of vessels for the Royal Navy and navies throughout the world. Smaller boats are also supplied to the commercial market. Specialist marine equipment is provided to both the naval and commercial sectors.
Overview VT Group welcomes the Defence Committee’s decision to hold an inquiry into Defence Procurement. We believe that this inquiry is timely as the debate on defence procurement policy is rapidly evolving. Both industry and Government need to take full advantage of the opportunities provided by the new business models being introduced in the commercial sector. VT Group oVers the following broad comments on current MoD defence procurement. We are happy for these comments to be made public, and are happy to expand on this issue, either through an oral evidence session, or with a further written submission if that would be helpful.
New Approaches to Partnering Traditional contracting is based on providing capabilities at the lowest possible cost using formal hierarchal structures with rigid contractual barriers. This isolates designers, contractors, suppliers and sub- contractors and discourages a collective approach to project delivery. The complex web of legal agreements associated with traditional contracting leads to a situation in which the companies involved are encouraged to focus on their own internal issues and objectives rather than combining to focus on the objective of project delivery. This approach also encourages a duplication of eVort in both skills and management. However other methods of procuring complex and high value equipment and capabilities are being developed both in the defence industry and other sectors. One example of this is in the UK oVshore oil industry. In the early 1990s it developed a new partnering approach to project delivery which typically resulted in savings of 20%. Broadly this was based upon collaborative working between organisations and service providers designed to achieve a shared set of business aims. This type of partnering depends not upon contractual clauses and tightly defined agreements but the establishment of the right attitudes, behaviours and culture among all partners from the start. Partnering agreements or charters should be introduced and agreed by all parties at the beginning of a contract. These would complement rather than duplicate the formal contract terms. They would set out in detail the principles, attitudes and objectives that all partners would be expected to adhere to. Issues such as the degree of openness, the spirit/culture in which problem solving will be handled and procedures for communication and relationship management should be included in the charter. Implementation of the charter would be conducted through a series of team building and charter development meetings requiring the active participation of senior management. This will cost time and money but provided these are eVective and productive they will be an essential part of the success of the partnering arrangement. Defence Procurement: Evidence Ev 123
By developing and using a shared risk register which all parties contribute to a joint approach to risk management can be developed. If all parties are aware of potential risks to successful project delivery all parties can and should contribute to the proactive management of these risks. A high degree of openness and transparency makes a vital contribution to project delivery. Clearly commercial confidentiality needs to be protected but more can be done to encourage greater information sharing. For instance open book accounting, together with other measures, can continually evaluate and demonstrate to all parties value for money. Actual costs and agreed profit margins should be made visible to the customer. This type of arrangement needs to be agreed at the start of a project. Relationship management should be a clearly defined and properly resourced activity. Teams or individuals should be appointed by all parties to undertake this task. Their job description would be to keep relationships open and constructive. This would involve identifying any potential blocks or obstacles to communication and taking appropriate action to avoid or remove them. Finally new incentive structures which enhance supplier profitability through profit sharing schemes need to be considered. However it is very important to ensure that any new structures ensure that increased profitability is seen by all partners to be properly earned through the successful operation of the partnering structures.
Strategic Partnering At the strategic level greater openness regarding long term Government expenditure planning would be helpful. This would not be detailed information on individual programme budgets but more general data on for instance future expenditure in a general capability area Reducing uncertainty for industry would encourage more eVective investment decision making. A re-assessment of how to protect and how to encourage innovative proposals in early stages of procurement programmes should be undertaken. While more eVort and resources has rightly gone into risk reduction at an early stage of the programme this can lead to problems if innovation developed by one company is shared with potential or actual competitors. By its nature an innovative proposal may need to be examined by a widely dispersed audience to assess its true value. However that may discourage industry from exposing such proposals to the MoD if this means that competitors—actual or potential—will also have access to the IPR contained in their proposals. A new and combined industry/Government approach to securing greater access to global defence markets should be developed and implemented. By developing a common position on this issue both industry and Government would be able to significantly strengthen their understanding of what trade barriers actually exist at present.
Conclusion The work that both industry and the MoD has been doing in developing and implementing some of these ideas is welcome. There has for instance been encouraging progress in improving openness and information sharing but more could be done. Greater scrutiny of how risk is shared would be welcome. We also suggest that both Government and industry should look at the new partnering methods that are being developed across industry and assess the costs and benefits of introducing the new techniques in defence procurement. Paul J Lester Chief Executive April 2004
Memorandum by Humphry Crum Ewing, Chairman, The Standish Group8
1. The current, still unsatisfactory, situation Procurement is, for purposes of financial analysis, the least satisfactory and most complex component of the Defence Budget and of Defence Finances generally.9 The process is also unsatisfactory for other, non- financial, reasons relating to the provision of defence capability and an informed understanding of this. There are numerous reasons why procurement is so complex and (therefore) why its reporting to Parliament is so unsatisfactory. Some of these reasons are well known and generally understood, but they nevertheless merit brief repetition. Others are less immediately apparent and merit illustration.
8 The Standish Group is an independent think-tank focusing mainly on Defence and Security issues. The writer was a Specialist Adviser to the Committee in the Parliament of 1997–2001 on the subject of Defence Related Information to Parliament and has been, since 2001 an Asociate Fellow of the Royal United Services Institute for Defence & Security Studies (RUSI). 9 The writer advises, in a personal capacity, the Shadow Secretary of State for Defence, Hon Nicholas Soames MP, on Defence Budgets and Finances. The views he expresses in this Memorandum are his own, not those of the OYcial Opposition or of RUSI. Ev 124 Defence Procurement: Evidence
2. Complexity of the Procurement Process The six main diYculties appear to the writer to be: 2.1 Equipment has become far more complex, involving systems as distinct from items and requiring (time-consuming and expensive) training and retraining if it is to be used to best eVect. The evidence seems to be that this trend, to ever greater complexity, will continue and that there is no scope for a pause to catch up. There are substantial problems in getting systems to work together which go beyond the problems of getting any given system to work of itself. 2.2 The procurement process, extending into the in-service life of equipment procured, has several distinct stages, each and all of such stages being a matter, usually, of years. This results in diVusion of responsibility, not fully met by the Integrated Project Team (IPT) concept and diYculties in “tracking”. 2.3 With this goes the fact that procurement (and logistics) are increasingly a matter of providing supplies and services rather than of stand-alone items of equipment. “Supplies” have always been a main concern of the logistic function, but increasingly they have become a matter of “contractor support”, (part of procurement) rather than of stocks of this, that and the other, to be bought and held in bulk and subsequently distributed. 2.4 New technology is being developed more rapidly than it can be embodied in equipment, with a result that systems may well be obsolete before they enter into service. 2.5 While most equipment is procured for a single service its actual use will be—or should be—largely joint. Treating the battle-space management system Watchkeeper as an exclusively “Army/Land” project rather than extending it into the Maritime Contribution to Joint Operations (MCJO) is an example of this which should be examined in detail. 2.6 The procurement control system is designed to prevent things going wrong (ie to achieve “regularity”) rather than to ensure they go right, by rapid and timely delivery.
3. Some Changes—For the Better? 3.1 The consolidation of the activities of the Defence Procurement Agency (DPA) onto a single site (Abbey Wood) near Bristol has enabled a tighter control system to be put in place and has generated opportunities for coherence. This consolidation was carried out by the previous Conservative Government, at the end of its period in oYce. This enabled the present Government to introduce Smart Procurement now renamed Smart Acquisition and to establish the Integrated Project Teams (IPT) concept. 3.2 A further addition to this is the concept of Incremental Acquisition. By this concept equipment and systems to be brought into service by stages and (progressively and continuously?) updated and enhanced when actually in service. 3.3 It is the writer’s observation that all these changes and developments have value and that each of them can usefully pave the way for further developments and cost-eYcient improvements, but that none of them is as yet contributing as fully as was hoped and as it should. There are for instance damaging discontinuities in the personnel of IPTs. Important and constraining problems of Intellectual Property Rights (IPR) follow from the participation of commercial members in IPTs. 3.4 Most recently (1 April 2004) a new top level budget (TLB) Corporate Science & Technology—has been created bringing together the Major Customers’ Research Budget (a sub-set of the old Procurement TLB) and the Chief Scientific Adviser’s (CSA) Higher Level Budget. Where the functions and finances of one of the successors to DERA, namely the Defence Science & Technology Laboratories (DSTL) will fit in to this has not yet been reported. 3.5 Much of the financial and working relationship with QinetiQ, the other successor to DERA also remains ambiguous and unclear, albeit essential to good procurement. 3.6 There is also now in place a (very generalised) Defence Industrial Policy. This recognises some at least of the problems of the UK’s Defence Manufacturing and Supply businesses, but does little to delineate a constructive path to resolving those problems. I return briefly to one aspect of this at 7.4 below.
4. Shortcomings in the Reporting Process 4.1 The chief oYcial source of collected information about Procurement is the Annual Major Projects Report (MPR). This is prepared by the National Audit OYce (NAO) and includes some tabulations and observations by the NAO but the great bulk of the document is in the form of directly re-produced MoD Project Summary Sheets. While the MPR is indispensable, is improving year on year and is often helpful as far as it goes, it suVers from serious limitations of scope and from a production timetable of its own that means that, by the time of publication, events have often moved on from the state as at 31st March, the cut-oV date. The information which it does contain is of uneven quality. The MPR really requires a whole submission of its own. The illustrations described at 5 below and shown in the Annexes to this paper are no more than “tasters”. Defence Procurement: Evidence Ev 125
4.2 Other publications There is a wide range of other publications relating to Defence Procurement, in hard copy and on the Internet. Some of this is oYcial, much is generated ex parte by Contractors, and much again is in the nature of informed commentary. There is thus no shortage of information, but it does not emerge in context, is invariably selective and designed to “make a case” rather than to inform. 4.3 Evasion of Parliamentary Questions Organised attempts to establish facts by way of Parliamentary Questions are usually evaded by the MoD. Again this is a matter which would merit a whole submission of its own. The work being done on Ministerial Accountability by the Public Administration Committee is helpful, but does yet go to the heart of the Defence Information problem, which is essentially a matter of providing information in adequate detail in a fully timely and consistent fashion, rather than one of withholding specific detail. 4.4 Reports of the NAO and the Public Accounts Committee These (going beyond the MPR) generate useful information, both generally and in relation to specific issues, but their concentration has been, to date, on where things have gone wrong rather than on the procurement process as a whole. Two current NAO enquiries would seem calculated to probe into this gap. The first, reported as The Management of Defence Research & Technology (HC 360) is a good analysis of problems, but largely a “Don’t yet know” on answers. The other, Tracking the Progress of Major Defence Projects, is still in the enquiry stage.
5. Some Illustrations There are set out in Annexes 1 and 2 to this Memorandum two illustrations of the shortcomings and inconsistencies of the MPR as mentioned above. Both reproduce from the MPR the pages of MoD project sheets setting out Key User Requirements (KURs) for the Project concerned. 5.1 (Annex 1) KURs for the Astor (Advanced Stand OV Radar) Project as given on p.60 of MPR ‘03. It is diYcult to believe that any serious purpose is served by continuing to “x- out” all the material information. The contrary is in fact true. 5.2 (Annex 2) KURs for the A400M and the CI7—formerly Short Term Strategic Airlift (SATA). These are two legs of the same (heavy Airlift) project. Taken together they pose the question as to why it is thought right to tell Parliament and the public so little about what the A400M can/will do, but at the same time such specific and detailed information is made readily available for the C17?
6. Some real difficulties 6.1 National security Genuine concerns of a national security do restrict what can be disclosed, but this reason is assigned, sometimes at least, for withholding information that would be harmless in this respect, although possibly tiresome in other ways. 6.2 Commercial Confidentiality This cuts in at least two diVerent ways. The first is when MoD, as purchaser, has an interest in keeping to itself knowledge of prices at which goods and services are being oVered. The second is when would be contractors wish to keep to themselves the terms on which they are oVering or providing services. It is understandable and broadly acceptable that such information should be kept in Commercial Confidence while negotiations are in progress. When contractual terms for the expenditure of public money have been agreed then prices should be brought automatically into the public domain. There is also a similar set of arguments about disclosure of what exactly a system should do and (looked at otherwise) exactly what capabilities are being bought for the Armed Forces with taxpayers’ money. Here again the balance needs to be changed in favour of disclosure. 6.3 Lack of cash figures The Committee will already be well aware of the transition of financial accounting and reporting by the MoD from cash to “Resource” terms following the coming into eVect of Resource Accounting and Budgeting (RAB). Proper prior consideration was not given to extent to which RAB would make it impracticable for Parliament to probe into what the MoD does with taxpayers’ money each year. This is the subject of ongoing probing by the OYcial Opposition, in which the writer is directly engaged. This probing is as much in respect of Parliamentary accountability generally as it is a matter of Opposition business. It has been undertaken by correspondence, parliamentary questions and further correspondence, often generated in the course of Answers to questions. This latter correspondence includes letters from Ministers, often delayed, and usually (noted as to be) “placed in the Library.” The present situation may be summarised as the MoD saying “the Treasury does not require us to report in cash terms and indeed only authorises us to report in Resource terms” and the Treasury saying “how the MoD reports is up to the MoD”. Ev 126 Defence Procurement: Evidence
Issues of cash and resources are particularly pertinent to procurement in that (a) the procurement process, certainly in the early stages of each project, is much more a matter of attributed overheads than of direct costs; (b) depreciation and carrying cost charges (as expressions of RAB) are large (and distorting?) elements in the cost of projects. This issue, so far as the present writer is concerned, is an ongoing one, which cannot be fairly summarised at this particular moment. He would welcome the opportunity of submitting an updating supplementary note at a later point in the course of the Committee’s Inquiry. 6.4 Mass and complexity of material and diYculties of Formatting Compared with the information available a few years ago there can be no complaint today about the volume of available information. The problem continues to lie in its incoherence. This is aggravated by the way source documents are formatted for the Internet, involving much time in down-loading and re- formatting them. This is made worse by selectivity and delays as to which documents are provided on which sites. 6.5 Information “in the form requested” There is a general problem arising in connection with Parliamentary questions, carefully drafted to elicit how much money is being spent on which projects and to support and sustain which capabilities. The corpus of information is collected by the MoD (to the extent that it is actually collected and collated, rather than just being allowed to happen) for “management” rather than “monitoring” purposes. It therefore shows outcomes and (sometimes) outputs. It does not show inputs, ie money spent and resources engaged. Answers to Questions directed to ascertaining the latter are all too often met by the statement that the Information is not collected in the form requested. The cash figures issue (6.3 above) is an extreme form of this. 6.6 Inadequacy of statistics The Defence Analytical & Statistics Agency (DASA) compiles a considerable volume of data. While all of this has some value, there is less than there needs to be about Procurement and much less than there should be about Logistics. DASA is conducting an internal enquiry on how to improve statistic on Logistics to which the writer has been invited to contribute and has contributed, but no results have yet emerged. 6.7 General Culture of Secrecy All the foregoing exemplify the “culture of secrecy” that still infects Government generally and the MoD in particular. However often it may be enunciated as policy, that everything should be disclosed unless there are good, considered and specific reasons why it should not be, the inclination is hold it back unless the case for disclosure is made. That is to say the opposite presumption is applied in practice to the one that should be applied in theory.
7. Some Helpful Steps that Could be Taken 7.1 Publication of the equipment plan A “Ten Year Forward” Equipment Plan is already prepared for internal use within the MoD with the status of Advice to Ministers. This should be published, notwithstanding the entrenched arguments against doing so. This would assist Parliament and the general public to understand for themselves what is intended and when and how the costs will fit into and shape the Defence Budgets of future years. 7.2 Through life management and costs MPR (and the NAO more generally) has sought to address these. Although they are “taken into account” there is no clear and practicable process for estimating them. They are well recognised as a necessary yardstick for measuring and monitoring procurement but, in reality they do not (yet) exist. 7.3 Systematic and ongoing improvement of statistics including, but not restricted to, comprehensive cash figures [See 6.3 and 6.6 above, but (much) more could be said] 7.4 Greater and earlier openness with Industry Much easier to call for—as many representatives of industry do—than to achieve. It is a double chicken and egg situation. (a) The Armed Forces are uncertain about specifying their desiderata and requirements until they know what industry can oVer. Industry feels it is excluded from knowing what to oVer until the Armed forces have explained and discussed their desiderata and requirements. It really comes down to the extent to which desiderata should be crystallised into requirements and the extent to which equipment concepts can be firmed up into practicable projects. (b) Industry wants to know, firmly, available budgets. The MoD wants to receive oVered prices before it comes up with indications of funds available. Defence Procurement: Evidence Ev 127
Summary and Conclusion — The decision of the Committee to enquire into Procurement is welcome and timely. The timeliness arises from the fact that defence expenditure as a whole is under critical political scrutiny and there is a considerable risk of easy-looking decisions being made which would in fact be false economies. — Procurement is a large and lumpy element in defence expenditure overall and specific items— particularly the “big ticket” ones—are nearly all optional and merit reasoned justification as well as careful scrutiny. — Changes in the procurement process have been made, many of them for the better, but the overall position remains far from satisfactory. —ItisdiYcult for Parliament, representing the taxpayer as paymaster, to see where the money is going. — It is also diYcult to see what is intended to come out and when. The “Ten Year Forward” Equipment Plan as already prepared for internal use within the MoD should be published—see 7.1 above. — A essential step in eVective monitoring by Parliament of Defence Budgets, Defence expenditure generally and Procurement expenditure and commitments in particular, is that all costs should be collected and reported in cash, for monitoring purposes, as well as in Resource terms for management purposes. — It is much to be hoped that the Committee’s Inquiry will result in some specific suggestions for further improvement in the Procurement processes and greater accountability for their financial management. It is impracticable to cover fully in this brief memorandum (and within the time available) all the issues concerned with procurement, but the writer would be pleased to amplify these observations and thoughts in Oral evidence if the Committee wishes. April 2004 Annex 1
ASTOR KEY USER REQUIREMENTS 1. Endurance Minimum of x hrs, within which x hrs at best endurance speed above x ft above mean sea level. x hrs at best cruise height and speed. 2. Altitude and Range : x ft and xkm3 3. Ground Station Transportability : C130 4. Ground Station Responsiveness : Pre-planned tasks within x hrs of sortie closure 5. Radar Range : Radar Range bracket xkm (Min far range—xkm (Max near radar range) 6. Air Platform Reaction Time : Turnaround ( xhrs 7. Air Segment Battlefield Mission : Moving Target Indicator scan rate x per min 8. Air Segment Battlefield Mission (1): x Synthetic Aperture Radar Spot xkms4 9. Air Segment Battlefield Mission (2): x Swathe Images per mission 10. Ground Segment Battlefield Mission: x days crisis and x days war Source: MPR ’03, as printed there p 60 Annex 2
A 400M KEY USER REQUIREMENTS (MPR ’03 p 39) No details specified but all simply reported as “met”. Compare with those for the C 17s and note how much less specific 1. Deployment Capability. 2. Payload. 3. Environmental Operating Envelope. 4. Tactical Operations. 5. Navigation Performance. 6. Communication System. 7. Defensive Aids Suite. 8. Aerial Delivery. 9. Crew Composition. Ev 128 Defence Procurement: Evidence
C.17 Key User Requirements (MPR ‘03 p 90) [All met and performed] 1. Deployment Capability: The [Short Term Strategic Airlift] STSA fleet must be capable of the deployment of 1,400 tonnes of freight over 3,200 nms in a seven day period. 2. Payload Requirements: STSA must be capable of carrying a payload of 32,000 kg. 3. Environmental Conditions: STSA is to be capable of operating in temperatures which equate to sea level figures -40 to !49 deg C. 4. Airfield Operations: STSA is to be capable of landing on airfields with paved surfaces of a minimum length of 4,000 ft. 5. Navigation: STSA is to be capable of world-wide navigation. 6. Communications: STSA is to meet current interoperability requirements for communications.
Memorandum by Tony Purton10 In view of the highly political nature of UK defence procurement and the need perceived by all parties in the House to foster an eVective and sustainable UK defence industry, it is time to consider a return to the non-competitive “cost-plus” procurement regime abandoned by MoD in 1985 in favour of competition and the commercial approach. Advances in the facilities and techniques for eVective real-time management and control of defence project timescales and costs through techniques such as Earned Evaluation Management (EVM) should make it possible to prevent the run-away costs that prompted the 1985 reforms. The civil sector is said to be making use of such techniques to manage full cost-reimbursement/no blame/no loss contracts (eg BAA with Heathrow Terminal 5), and MoD has acknowledged that it is studying contracting procedures used by the oil and gas industries. The recent re-writing of the fixed price contracts MoD agreed with industry for the Nimrod MPA4 aircraft and the Astute class submarines eight years ago signals the failure of any form of commercial approach to UK defence procurement where our own defence industry is concerned. The government that awarded those contracts would not have been prepared politically to award them outside the UK. The industry was put under contrived commercial pressure to accept taut contracts; they had to secure the contracts to remain viable. When industry failed to meet its contractual obligations, the political imperative to rescue it from diYculties of its own creation was overwhelming. With its commitment to order all warships from UK yards and systematic ministerial direction to award all major contracts in pursuit of the government’s Defence Industrial Policy published in October 2002, there is little scope for the application by MoD of the normal commercial judgements and pressures where major projects are concerned. Indeed, the existence of a taut commercial contracts binding on price, performance and timescale simply creates diYculties for both industry and government to work together in a spirit of partnership. The recent award of the Advanced Hawk trainer aircraft to BAE Systems to promote job retention and facilitate the export order to India illustrates the nature of the political/industrial imperative in defence procurement decisions. If a return to “cost-plus” defence contracting is perceived as heralding an increase in the costs of defence projects, this should be publicly acknowledged as the price of maintaining the UK’s defence industrial capability, securing with it UK jobs and the potential for arms export sales creating further UK jobs; even at the expense of obtaining best military value for the defence budget. In evidence to the Public Accounts Committee, Mike Turner CEL of BAE Systems asserted, several times, that any price charged by British industry for any defence product would always be far less than the cost of an American equivalent.11 Senior MoD managers have given evidence at Defence Committee hearings of the need for flexibility in a constantly changing world. Flexibility is the last thing one gets with a fixed price, tight timescale contract. The military want the product to give them the military capability they perceive the need for rather than a binding definition of an equipment configuration—they will change their minds. The political direction of defence procurement decisions is now so embedded in the defence management system that it is no longer possible to determine whether the problems suVered by the MoD are of their own making or the result of the political direction of MoD against its better judgement. At the PAC hearing on 23 February, MoD’s Permanent Under Secretary Sir Kevin Tebbit explained the process of ministerial decision-making on the Advanced Hawk trainer order that clearly shows that MoD is constitutionally prevented both from divulging the advice it gives to ministers or the directions it receives from ministers. This is due to changes in the Treasury’s Guidance to Accounting OYcers in 2001 introducing new paragraphs 10 & 11 as a result of recommendation 34 of the Cabinet OYce report “Wiring it up”. These
10 Former MoD career (32 years) procurement expert. MoD Director of Contracts 1988-93. Author of MoD’s Legal Awareness guidance extant 1991–2002. 11 PAC corrected evidence 23 February 2004 Questions 5, 7, 34, 66, 77. Defence Procurement: Evidence Ev 129
paragraphs encouraged “cross-cutting” to promote “joined up government”. There are now almost no circumstances under which MoD’s Accounting OYcers can challenge ministers who ignore their advice. The last open ministerial direction under the old paragraphs 13, 14 & 15 was in 1994 when defence secretary Malcolm Rifkind announced in the House that he had over-ridden the advice of his Chief of Defence Procurement (Malcolm McIntosh) to split the order for the RAF’s Support Helicopters between the Chinook and the EH101 Merlin. The MoD still has in place the accounting conventions for non-competitive government contracting. Despite an abortive Treasury-led attempt in 1999 to re-write these conventions, they are now undergoing a general review under the aegis of The Review Board for Non-competitive Government Contracts, the results of which should be announced later this year. The US DoD has a long history of defence procurement cost management monitored by the Congress through the General Accounting OYce (GAO). Fixed price contracting for US major weapon systems production was abandoned in the 1960s as a result of problems with the Lockheed C5A transport aircraft and Corsair 7 combat aircraft options contracts. The US Defense Contract Management Agency has recently completed a programme of modernisation of its cost monitoring systems to make them less bureaucratic and more project management orientated. It has taken the UK more than 40 years to realise that this is the sort of regime needed in the UK if government priority is the protection of our domestic defence industry. There is also a legal argument supporting a return to non-competitive contracting where political pressures to award the contract domestically are present. In two cases12 the House of Lords Privy Council condemned the rigging of competitive tenders. Their Lordships emphasised “The duty to act fairly meant that all tenderers had to be treated equally.” The implication of these cases is that where a contracting authority invites competitive tenders there is an implied contract that the authority will decide the award of contract against the terms set out in the tender documents and not against some pre-determined or post- bid-generated political agenda. This means that the MoD should seek ministerial direction before it invites any tenders rather than after the bids are received. In his evidence to the PAC on 25 February 2004, MoD’s Chief of Defence Procurement Sir Peter Spencer expressed his intention to clear his political lines before inviting tenders in future.13 Sir Peter is, after all, the oYcial who would stand accused of “misfeasance in public oYce” for the abuse of the tendering process.14 April 2004
Memorandum by the Defence Manufacturers Association (DMA)
Defence Industrial Policy
1. DMA member companies, large and small, welcomed the Government’s Defence Industrial Policy (DIP) with its declared aim of ensuring the retention of defence technology and jobs in the UK—irrespective of the ownership of the companies involved. Our overall conclusion, after some 20 months of the policy being launched is that no identifiable, tangible benefits have been delivered to date. This is unsurprising and the policy was not expected to lead to significant change in the short term. Other pressures on MoD budgets and procurement decisions, the war in Iraq, policy initiatives elsewhere in Government (eg. the new strategic Export Control Bill) and changes and imperatives in the market place have been of more profound influence than DIP so far. 2. The DMA believes that the successful implementation of a DIP is crucial to the future defence policy, security and strategic independence of the UK. Currently DIP forms part of a complex framework of defence, security, foreign policy, economic, regional and social policies. Yet, unlike policy in most other areas of Government activity, it relates to and is influenced by them all. Thus a “joined up” approach across the whole of Government is vital but not yet in evidence. 3. The DMA has been party to the production of current written evidence on DIP to the Committee by the Defence Industry Council (DIC) and supports its analysis. Generally this evidence reports on a number of areas of ongoing dialogue between Industry and the MoD. Although these are important in helping to develop the right relationships to ensure a successful implementation of DIP in future, they relate largely to process. Indeed, they reflect a current preoccupation, at some levels within the MoD, with process rather than output.
12 Harmon v House of Commons and Pratt Contractors v Transit New Zealand. 13 Corrected evidence Q185. 14 See House of Commons v Harmon. Ev 130 Defence Procurement: Evidence
4. The Committee is to take verbal evidence from representatives of the larger companies (including the Chairman of the DMA) and examine the progress of key projects. Rather than reinforce that evidence we would choose, now, to draw attention to significant concerns, of companies further down the supply chain, which we believe have significant consequences for DIP. Current MoD procurement policy places great emphasis on doing business via Prime Contractors. Prime Contractors are under great budgetary pressures, from the MoD and elsewhere, to operate globally and, understandably, will seek systems and sub-systems from wherever in the world they can be procured at best value for the benefit of the project in hand. Many lower tier jobs in defence manufacturing, as in other sectors, are thus being transferred to developing countries. At the same time, many defence Prime Contractors have major oVset obligations to other countries, as a result of success in the defence export market. This is further adding to the erosion of jobs and also leading to a transfer of defence technology from the UK. It is true that UK companies benefit from incoming oVset opportunities, mainly from the USA, but the current balance between UK’s defence oVset obligations to opportunities is 2:1 (circa £10 billion owed for £5 billion gained). Whilst there are now clear MoD guidelines for the consideration of DIP factors in the selection of Prime Contractors there is currently no eVective mechanism for assessing and influencing the Defence Industrial Policy aspects of the procurement decisions of the Primes themselves. This is leading to a serious erosion of capability in the UK defence supply chain and the loss of some well established UK SMEs with unique products and expertise. Ironically, this situation arises most with non-competitive procurements. In major competitions (such as CVF) there is usually political and public guarantee by the bidders, outwith the MoD process, of the security of jobs and technology in the UK.
Smart Acquisition 5. The DMA has previously reported to the Committee on the experiences of its members of Smart Acquisition. Improved relationships and communications have been balanced by concerns about “stovepiping” (ie. lack of coherence/integration) between projects, excessive risk transfer to suppliers, reducing technical expertise amongst DPA staV and the bureaucratic burden for companies that have to deal with a large number of separate Integrated Project Teams (IPTs). We therefore, very much welcome the recent changes introduced, following a “Stocktake”, by the Chief of Defence Procurement (CDP) which include improved key supplier management, a new (and somewhat more hierarchical than of late) organisation in the Defence Procurement Agency (DPA) and increased project responsibility for his senior Directors. This should greatly improve coherence between projects and in the procurement process. 6. The single, largest complaint from DMA member companies at present is of excessive delays in MoD decision making. This is not confined to one area of the MoD and relates equally to PPP/PFI projects as to conventional procurements. These delays are very expensive and frustrating for industry and costly, too, for the MoD. Examples, apart from the high profile ones such as FRES and Air Tanker, include the Future Support Vehicle (FSV), Airfield Service Support Project (ASSP), Chatham Facilities Management and Armoured Vehicle Training Systems (AVTS). The latter is years late and currently undergoing a third round of best and final (sic) bidding. 7. PPP/PFI support projects are of particular concern. Many of them involve a public sector comparator (PSC) based on the costs of the current, in service, provision. Invariably, industry is invited to bid for the provision of an improved and less risky service. It is not surprising that the cost of each of the competing bids often exceeds the MoD’s budget provision, projects cannot proceed as planned and the options are still being studied long after original deadlines have passed. 8. With regard to through life management (TLM), there is clearly much still to be done before a really eVective approach is found in the MoD to the challenge of funding and managing projects on this basis. Investment up front in procurement to achieve real support costs savings downstream is still a strong aspiration rather than a reality at present. However, recent decisions by CDP and Chief of Defence Logistics (CDL) to make all their IPTs dual-accountable and give added emphasis to through life management (TLM) are important enablers. They will require equal support and commitment from the Treasury, MoD Centre, Industry and from their Navy, Army and Air Force Customers if they are to succeed. May 2004
Memorandum by BAE Systems On reviewing the transcript of the evidence Sir Richard gave to the Defence Select Committee on 5 May (Questions 26–28) there is only one area of clarification he would wish to oVer. In response to Q26, Sir Richard indicated that we gave undertakings to the US Government about adopting the US Foreign Corrupt Practices Act (FCPA) “at the time of the Marconi transaction”. This transaction was completed in November 1999. Defence Procurement: Evidence Ev 131
The US businesses that were involved in the BAE/Marconi merger in 1999 were, of course, fully subject to the FCPA both before and after the transaction. In relation to the non-US businesses, in September 2000 the Board of BAE Systems plc adopted a resolution to the eVect that the non-US businesses of BAE Systems would comply with the anti-bribery provisions of FCPA as if those provisions applied to them. It was in November 2000 that the merged entity BAE Systems entered into a commitment to the US Government that it would act in accordance with the FCPA and the anti-bribery standards of the OECD Convention for its global operations. These undertakings were given in the context of the acquisition by BAE Systems of the Lockheed Martin Sanders business. June 2004 Defence Procurement
Reports from the Defence Committee since 2001
Session 2003–04
First Report Armed Forces Pensions and Compensation HC 96–I & II (Cm 6109) Second Report Annual Report for 2003 HC 293 Third Report Lessons of Iraq HC 57–I, II & III (HC 635) Fourth Report Strategic Export Controls: Annual Report for 2002, HC 390 Licensing Policy and Parliamentary Scrutiny Fifth Report The Defence White Paper 2003 HC465–I & II
Session 2002–03
First Report Missile Defence HC 290 (HC 411) Second Report Annual Report for 2002 HC 378 Third Report Arms Control and Disarmament (Inspections) Bill HC 321 (HC 754) Fourth Report The Government’s Proposals for Secondary HC 620 (Cm 5988) Legislation under the Export Control Act Fifth Report Strategic Export Controls: Annual Report for 2001, HC 474 (Cm 5943) Licensing Policy and Parliamentary Scrutiny Sixth Report A New Chapter to the Strategic Defence Review HC 93–I & II (HC 975) Seventh Report Draft Civil Contingencies Bill HC 557 (Cm 6078) Eighth Report Defence Procurement HC 694 (HC 1194)
Session 2001–02
First Report Ministry of Defence Police: Changes in jurisdiction HC 382 (HC 621) proposed under the Anti-terrorism Crime and Security Bill 2001 Second Report The Threat from Terrorism HC 348 (HC 667) Third Report The Ministry of Defence Reviews of Armed Forces’ HC 666 (HC 115) Pension and Compensation Arrangements Fourth Report Major Procurement Projects HC 779 (HC 1229) Fifth Report The Government’s Annual Report on Strategic Export HC 718 (Cm 5629) Controls for 2000, Licensing Policy and Prior Parliamentary Scrutiny (Joint with Foreign Affairs Committee, International Development Committee and Trade and Industry Committee) Sixth Report Defence and Security in the UK HC 518 (HC 1230) Seventh Report The Future of NATO HC 914 (HC 1231)
Government Responses to Defence Committee reports are published as Special Reports from the Committee (or as Command papers). They are listed here in brackets by the HC (or Cm) No. after the report they relate to.
Printed in the United Kingdom by The Stationery OYce Limited 7/2004 978008 19585