Ministry of Defence: Major Projects Report 2004 (HC 294-i) Public Accounts Committee 31 Jan 2005

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

Q40 Mr. Gerry Steinberg (City of Durham): Thank you, Chair. We as members of the Committee base our questions on the report that we receive and consequently we regard the reports that we receive as a true reflection of the Department; otherwise we would not be seeing it in the first place. We have 100% faith in the National Audit Office anyway, so if we see something and it is written in the report, we accept that. I just say that to begin with. When we looked at the Major Projects Report last year we found that the results, if I remember rightly, were the worst ever recorded and, following on from the line of questioning by the Chairman, you seem to think, Sir Peter, that one year on things have improved. But the report does not reflect that view, does it?

Sir Peter Spencer: I said it in the context that this time last year I forecast that it would be another bad report but the report would not be quite as bad. So in a comparative sense it moved in the right direction.

Q41 Chairman: Could you speak up a bit, Sir Peter?

Sir Peter Spencer: Nobody is pretending that this is anything other than a poor and disappointing report. I am merely noting that the numbers are lower, both in terms of the cost overrunning year and the time overrunning year.

Q42 Mr. Gerry Steinberg (City of Durham): You look at figures 5 and 7, on pages 9 and 11, and taking page 9 first, what you have just told us does not seem to reflect what we read in the report because we can see quite clearly in figure 5 that costs have increased in-year on 11 projects and have decreased in six projects. The ones that have increased in the 11 projects have increased very considerably. Is that a cause for concern and do you regard that as being progress?

Sir Peter Spencer: Yes, it is a cause for concern; no, I do not regard that in itself as progress other than, as I said last year, I asked the project leaders to make sure that they took a really hard look at their programmes. So we were expecting further bad news to come out of projects which had not been adequately prepared, which had not been adequately de-risked before we placed them on the main contract for demonstration for manufacture. So these were the figures that I was expecting to see.

Q43 Mr. Gerry Steinberg (City of Durham): It would not be so bad, I suppose, if one could see, like in any business, that some things go wrong and some things go well and what you lose on the roundabouts you gain on the swings, but in this case that does not happen, does it? All the savings that you have made do not, for example, cover the cost of the Nimrod MRA4, does it? So you are making very, very small savings on six projects - and if you read the report it seems to indicate that that is great, 11 projects have been increased, six projects have decreased, therefore it is running smoothly. But that is not the true reflection when you look at it because the savings are minuscule compared to the actual overspend.

Sir Peter Spencer: It is a statement of fact and I agree with it.

Q44 Mr. Gerry Steinberg (City of Durham): Yes, a statement of fact. Why?

Sir Peter Spencer: Because these projects were not properly de-risked and retrospectively it is an extremely difficult thing to do to predict where they are going to run into problems, and, as I have said previously, this is a long process with long lead times to turn the projects around in terms of the problems you will see reflected in this report.

Q45 Mr. Gerry Steinberg (City of Durham): Figure 5 is bad enough in terms of costs but then we turn to figure 7 - and it would not be so bad, would it, if they are costing 17% more if they were being produced on time? But not only are they costing a huge amount more but the timescale gets worse. So they are costing more and it is taking longer for them to be produced. As a layman, why is that?

Sir Peter Spencer: Part of the explanation of course is that the notional interest charge on capital increases the longer these projects remain on my balance sheet, and so 500 million of that total figure that you see is a notional charge which is not being paid by the front-line commands on their balance sheets. So there is a direct relationship between time and cost. What you are observing is what I expected to see, when I sat on this Committee last year and told you that we needed to get a re-baseline programme with greater realism. This is realism in those programmes.

Q46 Mr. Gerry Steinberg (City of Durham): I will not be here next year, but in the Major Projects Report next year would you expect to see, for example, figure 7 not showing a delay on projects?

Sir Peter Spencer: There will be further delays on projects next year because not all of these programmes have been properly de-risked.

Q47 Mr. Gerry Steinberg (City of Durham): So for how long does this go on?

Sir Peter Spencer: I would expect the total amount slippage to be reduced. It will be reduced year on year.

Q48 Mr. Gerry Steinberg (City of Durham): So when do we get to a stage where figures 5 and 7 will not appear in the report?

Sir Peter Spencer: I believe I will be in a better position to give you an answer next year. One swallow does not make a summer; I cannot possibly give you an accurate prediction, I am sorry.

Q49 Mr. Gerry Steinberg (City of Durham): Do you have no target?

Sir Peter Spencer: I do have targets.

Q50 Mr. Gerry Steinberg (City of Durham): How long is the target?

Sir Peter Spencer: We have the target to drive these programmes into line so far as in-year slippage is concerned within four years.

Q51 Mr. Gerry Steinberg (City of Durham): Four years.

Sir Peter Spencer: But what I am telling you is that in terms of the major project projects, which are the top 20, many of which were let on contracts some years ago, there is not a great deal we can do now to recover the slippage which has already occurred or the cost overruns that have already occurred. So in absolute terms these projects are still going to continue to show a disappointing result until we clean them out of the system.

Q52 Mr. Gerry Steinberg (City of Durham): Turning to figures 14 and 15 in Appendix 3, page 31, they make even more disappointing reading, do they not? Here we have ten projects finishing between 35% and 5% overspent. Now, 5% might seem a very small amount of money and 35% seems a lot of money. Just as a matter of interest, in those ten projects that I am talking about that are between 35% and 5% overspent, how much of that is in real terms, in cash real terms?

Sir Peter Spencer: We do have a figure and I will find it for you. The total amount of cost growth this year against the 50% approvals, which is what this based on, therefore, we say, a tougher measure than last year, I think is £4bn, but I need to make sure that those are the correct figures.

Q53 Mr. Gerry Steinberg (City of Durham): Four billion is a lot of money. What you are saying then, if that is the case, that in four years' time we can expect to have figures that do not reflect this sort of figure?

Sir Peter Spencer: No, that is not what I am saying. What I am saying is that the in-year cost movements and the in-year slippage movements will be driven down to much lower levels so long as we meet the key targets in the Agency and so long as in programming terms the Department does not choose to change its mind over the scheduling on these projects, which it occasionally does for operational reasons. May I just correct my figure which I gave you as £4bn, it should be £6 billion.

Q54 Mr. Gerry Steinberg (City of Durham): Million or billion?

Sir Peter Spencer: £6bn.

Q55 Mr. Gerry Steinberg (City of Durham): Billion. Before my time runs out, figure 15 on the next page, we find that projects are £6bn overspent but we also find that projects come out in some respects over six years late. Six years late, £6bn overspent, what does that do to our military capabilities?

Sir Peter Spencer: The Lieutenant General can explain that.

Lt Gen Fulton: To take specifics, in the case of MRA4 it means running on the MR2 for longer so that we have a capability. In the case of Typhoon it means balancing out the capability that Typhoon would have given us against Tornado F3 and the Jaguar. In the case of the Astute Class Submarine the S & T boats. So, as I explained earlier, in capability terms what we have to do is to make sure that we do not lose the capability, but that clearly means then running on those aeroplanes and boats over the delay. Clearly also within that we need then to look at the numbers, for example, for Nimrod MRA4 and the capability and look at how we might grow that over time.

Q56 Mr. Gerry Steinberg (City of Durham): So really what you are saying is that our capability is diminished?

Lt Gen Fulton: No. I am saying that it does not necessarily increase at the rate. MRA4 is a significant improvement in capability to the MR2; the MR2 is a good aircraft but it will run out of life in about 2016, therefore what we do need to do is to make sure that we get this capability in before the other goes out. So our capability is not going down but we need to maintain it.

Q57 Mr. Gerry Steinberg (City of Durham): The final question is, if any other Department in Whitehall was £6bn overspent, presumably they would have to make cuts. Do you make cuts?

Sir Peter Spencer: This is not money which we have overspent on this. It is a reflection of the lack of realism in the original estimates against the budget, and it that is an important point to reflect in this discussion because the whole approach that the tools are bringing to us is to get greater realism from the outset. So what you are seeing is a level of disappointment.

Lt Gen Fulton: If I could also say that that is also - remember in the case of the JCA - spread over ten, 12, 15 years. So a projected cost growth in the JCA programme, I will have to deal with by looking at the rate at which they are delivered or indeed the rate at which UK specific weapons are integrated on to them. So there is an example where it is not a question of making a cut but it is a question of adjusting what the forward plan looks like, as I say, over a very long period.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.