Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 188 - 199)




  188. Today we shall be taking evidence on Parts 1 and 2 of the Comptroller and Auditor General's Report on progress with major defence equipment projects, the Major Projects Report 2000, after taking evidence on Monday on Part 3. In Part 1 of his Report the Comptroller and Auditor General examined 20 largest projects in the demonstration and manufacture phase against the cost, time and technical targets set at Main Gate approval. Part 2 of the Report assesses the Department's progress in setting appropriate targets to measure project performance during the assessment phase and examines the performance of the top ten projects currently in the assessment phase. The witnesses are Sir Robert Walmsley, Chief of Defence Procurement and Chief Executive of the Defence Procurement Agency, and Vice Admiral Sir Jeremy Blackham who we were told on Monday is his customer. Welcome, gentlemen. The Report concludes that there is evidence that the Department might have begun to control costs better during the demonstration and manufacture phase, but control of time remains a problem. Paragraph 1.16 states that the average project delay is getting longer, having increased by just over three months in the last year. Why are the delays getting longer and why are we not seeing a clear improvement in time-scale performance under Smart acquisition?

  (Sir Robert Walmsley) I can go through the six projects that were delayed in year, Chairman.

  189. Can you give a summary view?
  (Sir Robert Walmsley) The summary view is that the delay total this year was 63 months, which splits into roughly three equal pieces, one to align missile projects with aircraft projects—24 months. There was also, if I could just look at my notes, an issue of technical difficulties which was 19 months, and we had a budgetary deferral of about 18 months. That is really three equal parts.

  190. Let me pick up one project, the relatively young Sting Ray Life Extension programme, which is showing a 25 per cent cost overrun since Main Gate approval in 1995 and has already slipped by 41 months, and still has another 74 months to go before it reaches its in-service date. What is going wrong on this project and what are you doing to ensure that there are no further cost overruns or slippage?
  (Sir Robert Walmsley) It took us substantially longer to place the contract for the Sting Ray project after achieving the equivalent of Initial Gate approval and during the negotiation of the contract, which took us nine more months than we had expected, we also agreed with the contractor that the project itself was going to take eight more months. That makes a total of 17. But the biggest single delay has been that twice we have taken a 12-month delay to accommodate budgetary issues. Looking ahead from now, we have a good contract and the improved torpedo is planned to be demonstrated at the Atlantic Undersea Test and Evaluation Centre (AUTEC) in the Western Atlantic during this year. If that goes to plan—and we expect it to do so—then we will go ahead and seek Main Gate approval and will achieve the in-service date of May 2006.

  191. When you say budgetary issues, does that mean you are just slipping projects in with cash?
  (Sir Robert Walmsley) Correct.

  192. The Eurofighter on page 72 shows that the project is reporting a negative cost variation of £218 million due to the transfer of industrial consortia management activities from the production phase to the support phase. I note, however, that the approved cost has not been reduced accordingly. Why not?
  (Sir Robert Walmsley) The approved cost is a fact of history and stays the same. The reason that this cost reduction took place—I am not sure if that was this year, I think it might have been last year—was that there are two management companies in Munich, one called Eurofighter and one called Eurojet, and they both have their costs borne on Eurofighter contracts, and the only Eurofighter contracts that were in place at the time that MPR 99 was written, which is I think when this came out, were the development and production contracts, so the costs of these two management agencies were entirely attributed to the procurement project. Once we had put in place the first logistic support contracts for Eurofighter, which we did last year, it then became sensible to attribute the right proportion of those management agency running costs to the logistic support contracts on whose behalf they were working. Effectively, the contract became available and we put it in the right place. I have to say, Chairman, that that is entirely an accounting exercise—it does not do anything to reduce the real cost of the project—but it was also an accounting exercise that put up the cost of the project by £275 million when we took the DERA costs into the project, and I have never received any sympathy for that.

  193. It may be that I am suffering from a misunderstanding. Comptroller and Auditor General, it looks to me likes this £218 million of extra funding has been used to, effectively, fund further cost growth.
  (Mr Banfield) There is a £218 million apparent reduction in the costs being shown in the Major Projects Report because of the transfer of those management costs to the support phase, and the support phase costs are not shown in the Projects Report.

  194. So there is £218 million extra?
  (Mr Banfield) Effectively.

  195. What is the Treasury's view on this?
  (Mr Glicksman) My understanding is, as Sir Robert said, that this was an accounting change. The costs that were included in the development of the project have been transferred to the support phase later on, and it does not alter the total cost of the project, it just transfers where the money is for. Unless I have misunderstood.

  196. I am not sure that I have understood this properly. I would like you to have a look at this. We may need a note on it. Let us move on. Paragraph 1.9 tells us that £513 million of the £960 million overrun on the Merlin Mk 1 programme is due to technical factors. Given the huge additional expenditure necessary to rectify these technical difficulties in the past, how do you explain that we are seeing evidence of problems with the Merlin Mk 1 aircraft now entering service, and what are you doing to remedy the current problems?
  (Sir Robert Walmsley) The question was about solving problems on Merlin Mk 1?

  197. You have got £513 million of the £960 million overrun due to technical factors. Presumably that is to solve technical problems and we are still seeing technical problems in the introduction of the Merlin, are we not?
  (Sir Robert Walmsley) There was a very serious crash of an aircraft two months ago.

  198. Which then sank despite its flotation bags?
  (Sir Robert Walmsley) It did.

  199. What was the fairly straightforward reason?
  (Sir Robert Walmsley) The board of inquiry has not yet pronounced, Chairman, but we are entirely satisfied that the events were specific to that aircraft and there is no generic design fault. The technical costs here are not solving new technical problems, these are largely historic events. I think there will be some costs associated with the crash because you cannot suspend flying for nearly two months without finding some extra costs because things will take longer and people have to get paid whether they are flying or not flying, but they will not be significant.

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