MOD: Major Projects Report 2003 (HC 383-ii) Public Accounts Committee 25 Feb 2004

Evidence given by Sir Peter Spencer KCB, Chief of Defence Procurement, and Lieutenant General Rob Fulton, Deputy Chief of the Defence Staff for Equipment Capability, examined.

Q216 Mr. Gerry Steinberg (City of Durham): Sir Peter, although Smart Acquisition is a relatively new initiative designed to ensure cheaper, faster and superior equipment, is there any evidence to show that it is succeeding in meeting its aims? If you read the Report, there appears to be more evidence to show that it is not meeting its targets because there are still long delays and increased prices. Can you explain the actual situation?

Sir Peter Spencer: The situation is encapsulated by the National Audit Office Report which recognises that the so-called Smart projects are doing better as a class than the legacy projects, but there are worrying signs that they are not going to deliver the results that we expected, notably because of the way in which risk differential, as it is called, - in other words, the contingency which is put in to cover against difficulties that might occur - is being consumed so early on in the process, and if you are analytical about this and you look at the history of other projects and you recognise the point in the lifecycle where trouble emerges, then we should be extremely cautious, which is why I initiated the work which I have done on arriving in this post.

Q217 Mr. Gerry Steinberg (City of Durham): So there are problems with Smart Acquisition but what you are actually saying is that you believe that it is a better system than we had previously?

Sir Peter Spencer: It has only been partially implemented and if you look at the seven principles which were identified there are a number which need to be put into place more comprehensively. If I can just give you a quick example, we are not spending anything like the amount of resource we should on complex projects in the assessment phase. In other words, we are not de-risking the capital investment decision which we make. My job is to manage uncertainty and risk and we have to do that better.

Q218 Mr. Gerry Steinberg (City of Durham): On page 17, paragraph 1.25, the Chairman touched upon this in his opening remarks and asked you specifically how you were implementing point three, "to create a better, more open relationship with industry", and you gave a pretty comprehensive answer to that question. Clearly in this paragraph it seems to say that not enough has been done to ensure that Smart Acquisition will succeed. It then goes on with the six points, the third one of which you have covered quite comprehensively. It is okay, is it not, to have theoretical solutions to problems but those theoretical problems have to be put into practice? How do you intend to put those other theories into practice?

Sir Peter Spencer: Because in order to do those things you have to make sure you can measure that you have done it and be candid and honest with yourself and your people about the extent to which it is being done. Therefore, for each of those things we are working up under the new arrangements something which we can measure to show we are doing it, and I can give you examples of each of them if you are interested.

Q219 Mr. Gerry Steinberg (City of Durham): No, no. If you want to give a note perhaps that would be the best way.

Sir Peter Spencer: Most importantly, we are making sure that the processes are better defined, that the results are measured, that there is a compliance regime. There are 700 projects of that kind, so there will be a compliance regime to make sure that everybody is doing it and much stronger corporate governance at the executive board level.

Q220 Mr. Gerry Steinberg (City of Durham): You say that, and obviously we hope you are very successful. One thing that sticks in the crop of most members of this committee who were there at the time, and I mentioned this only a fortnight ago in the debate on the floor of the House, was what appeared to us to be the debacle of the Apache helicopter where we had the brand new Apache helicopters, state of the art machines which could have been used apparently in the war in Iraq but were in store because there were no pilots to fly them; they had not been trained. In this Report it seems that you are going down exactly the same line with the new Typhoon aeroplanes. You are not splitting training and manufacture. You seem to have the same contract as you had for Apache. Do lessons never get learned or am I misinterpreting what is in the Report?

Sir Peter Spencer: I think there is a misunderstanding of the status of the trainer which is on track in this case. What I would say in terms of whether or not we are addressing that particular problem, such as the attack helicopter, is that the first bullet, "to improve the ability to manage projects on a whole life basis", is precisely what we are talking about because what we are making sure is that not only do we deliver the equipment but that it is affordable and sustainable through life, that we are identifying the people who need to man it, that we are identifying what they may need to do to get trained, and we are making sure we put the infrastructure into place so that we can look after it as well. This is part of the remit of a Single Responsible Owner who looks across all of what in army terminology are called the six lines of development to ensure that there is coherence and that we do not do the attack helicopter again.

Q221 Mr. Gerry Steinberg (City of Durham): What you are actually saying is that you are not making the same mistakes as you made with the Apache helicopter in terms of training and doing the same contract?

Sir Peter Spencer: So there will be no excuse to make because we now know how to do it and have a compliance regime that should deliver.

Q222 Mr. Gerry Steinberg (City of Durham): Do you think you have made a mistake in splitting the landing ship contract?

Sir Peter Spencer: Between BAE Systems -

Q223 Mr. Gerry Steinberg (City of Durham): The reason I say that is that it seems to me quite clear that, regardless of what was said on Monday, and I think I used the expression "you are caught by the proverbials", like it or not, you are. You do not seem to have many options - of course, that is not your fault; that is the industry - and once they get hold of the contract then it appears to me that they can more or less hold you to ransom. By splitting a contract and giving it to two manufacturers does that not give two manufacturers the opportunity of holding you to ransom?

Sir Peter Spencer: It spreads risk. It also causes complications.

Q224 Mr. Gerry Steinberg (City of Durham): It does?

Sir Peter Spencer: Yes.

Q225 Mr. Gerry Steinberg (City of Durham): If that is the case, why did you give BAE half of the contract when it was Swan Hunter who actually designed the project, who are going to build the project but were only given half of the contract itself? Why would you do that? Why did you give BAE half of the contract? Why not give Swan Hunter the whole contract?

Sir Peter Spencer: The thinking at the time was centred upon the need to sustain the industrial base of shipbuilding. In that context there is a workforce at Govan, there is a workforce on the Tyne, and -

Q226 Mr. Gerry Steinberg (City of Durham): So it was a political decision for jobs, basically?

Sir Peter Spencer: I have to be a little bit careful because I was not part of the decision.

Q227 Mr. Gerry Steinberg (City of Durham): I do not criticise that at all. I think that is good.

Sir Peter Spencer: What I am saying is that there are occasions where the judgment has to be made for the longer term. We knew we had a large shipbuilding programme in the offing. We needed to look at the industrial base which was available and to ensure that we did not gratuitously lose some of it when there were options open to us for value-for-money prices which could deliver the outcome which the military needed but at the same time sustain the industrial base.

Q228 Mr. Gerry Steinberg (City of Durham): I do not criticise that at all. I would support that kind of policy if that is what it was done for. Can we turn to page 105, 1c "Procurement strategy". I have got to be quite honest: I do not really understand this. What it says here is that Swan Hunter from Tyneside, and you understand why I am picking on this particular item, "Design & build" two of the ships or docks, and their contract type was a firm price, and I read that to mean that there is a price been given and that is the price that they are going to be paid, and they got it through UK competition; yet for BAE Systems the contract type is "maximum price to be converted to firm price", and I do not understand what that means, and they did not appear to do it through contract, through tendering. If I am right in my interpretation, why was Swan Hunter treated differently from BAE Systems?

Sir Peter Spencer: Because the actual price will be paid for a shipbuilding project.

Q229 Mr. Gerry Steinberg (City of Durham): This does not mean that BAE can come along at a later date and say, "It has cost us 2% more or 3% more", and therefore they will get a bigger slice of the cake, if you like, on the basis that they are negotiating whilst the building is taking place whereas Swan Hunter have a firm price regardless? It does not mean that, does it?

Sir Peter Spencer: What I was about to say was that the way a ship is built, of course, will reflect the different overhead arrangements charged by different companies. A company like British Aerospace will have a different overhead structure than a company like Swan Hunter, so in terms of matching the numbers there is bound to be a discussion on that. There was also a discussion in terms of the prices which under the circumstances were going to be paid because a follow-on build contract, which is what is being done by BAE Systems Marine, is predicated on the supply of design information from the lead yard, and so there are bound to be some differences in the way in which the detail of the contract is put into place and that reflects itself in terms of additions which will in turn reflect itself in the prices.

Q230 Mr. Gerry Steinberg (City of Durham): But at the end of the day will the end project be exactly the same from both yards?

Sir Peter Spencer: It is because they are being built to the same design.

Q231 Mr. Gerry Steinberg (City of Durham): Therefore that is why I cannot understand. Why will the prices be different?

Sir Peter Spencer: They will be essentially the same but there will be some variations to take account of the fact, as I have just described to you, -

Q232 Mr. Gerry Steinberg (City of Durham): Who is doing it cheaper?

Sir Peter Spencer: I am not prepared to give details of commercial information in a public forum.

Q233 Mr. Gerry Steinberg (City of Durham): I do not see how that is commercial information. It is just a simple question: is Swan Hunter providing it cheaper or is BAE Systems doing it cheaper? I cannot see what is commercially sensitive about that.

Sir Peter Spencer: I can assure you that when I send you a note you will realise why it is commercially sensitive.[3]

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Q315 Mr. Gerry Steinberg (City of Durham): Last Monday, Mr Turner said in relation to paying for contracts that nothing had been decided upon on the new aircraft carrier. Have you decided how you are going to pay for it and which method of payment you will use, because he seemed quite adamant he was not going to get involved in a contract that was not - was cost plus profit -

Sir Peter Spencer: The point was also made he is the preferred prime contractor. We will do business on our terms, not on his - or preferably on terms that we have agreed together.

Q316 Mr. Gerry Steinberg (City of Durham): So what happens if he then refuses his company to build it? There is nobody else, is there?

Sir Peter Spencer: As you appreciate, there are other options.

Q317 Mr. Gerry Steinberg (City of Durham): What are they?

Sir Peter Spencer: One of the conditions of the sale of the shipyards to GEC and now BAE Systems is that they are available if necessary to be used under fair and reasonable terms by other contractors. We would enforce the agreement in extremis. I would not expect it to come to that.