Select Committee on Defence Appendices to the Minutes of Evidence


APPENDIX 18

Submission to the Clerk of the Committee on the Warship Support Modernisation Initiative (NWMI) from UCATT, T&G, Prospect, PCS, AEEU and GMB (22 April 2002)

INTRODUCTION

  1.  The Ministry of Defence Trade Unions (the Unions) contend that the decision taken by the Secretary of State for Defence (S of S) to contractorise the majority of the three UK naval bases through `Partnering' arrangements with the three dockyard companies is wrong. It is neither in the national interest nor in the interests of the taxpayer.

  2.  It is not in the national interest because:

    —  it will mean further fragmentation of the delivery of services to the front line and a deterioration of that service;

    —  it will create monopoly suppliers of these services to the fleet that will increase rather than lower the costs;

    —  it will lead to the misuse of shore based service personnel in the generation of profit for a private company;

    —  it is underpinned by contractual arrangements shown by the D154 project to be extremely high risk;

    —  the process has seriously damaged the previously excellent industrial relations within the Ministry of Defence (MOD).

  3.  It is not in the interests of the taxpayer because it has come from a flawed process that did not provide a sound basis for a Value for Money (VFM) judgement of the options available.

  4.  We believe the business case prepared by the MOD and endorsed by S of S was not as robust as it should have been. It did not fully reflect the entire picture and did not allow for the preparation of a credible Public Sector Comparator.

  5.  MOD officials conducted the review favouring the commercial solution over that of an in house solution with the driver the need to extradite the MOD from the Dockyard Sales Agreement and the allocated work programme. All else was secondary including developments in the Warship Refit/Repair arena and the Department's own financial position, which has changed dramatically since the original studies concluded.

  6.  As a result the business case found in favour of the MOD's desired outcome rather than the best outcome for the MOD, the workforce or the taxpayer.

  7.  We believe that there are a number of key questions needing exploration with the Chief Executive of the Warship Support Agency (CE WSA) and others involved in both the MWMI and the decision making process. We are disappointed that S of S did not address them in response to the brief submitted to S of S by the Unions on 12 February 2002 before he made his decision, but welcome the opportunity to feed them in through the HCDC.

KEY QUESTIONS

  8.  We believe that the key areas for questioning fall into five main categories:

    —  Process: including a comparison of the resource allocation against each option being considered and an examination of how this process provided a sound base for a VFM judgement to be made (National Audit Office Report (NAO));

    —  Evaluation: including how like was not compared with like and how the proposals solved the overcapacity issue;

    —  Savings Levels: including an examination of how the projected savings increased by 50 per cent;

    —  Value for Money: including transition and implementation costs, redundancy payments, use of service personnel at discount rates, etc;

    —  Implementation: including the lack of an attempt at justification through consultation, nuclear safety issues and affordability.

PROCESS

  9.  In our submission to S of S we asked that he look at our assertions that the process favoured the company and, specifically, to examine the following areas of MOD expenditure within the process:

    —  the costs of the Directors Strategic Development and their support staff in each naval base;

    —  the costs incurred by Naval Base Commanders (NBCs):

      —  in support of the company proposals,

      —  in preparing the NBC Benchmark and

      —  in working with the Unions on Benchmark Plus;

    —   the company costs on each site;

    —  the costs of the Integrated Business Team (IBT) permanent staff;

    —  the costs of Price Waterhouse Coopers and other consultants used.

  10.  We have not been made aware that such an examination took place.

  11.  The question requires asking of MOD whether or not there was a fair allocation of resources against each of the options available that led to confidence in the decision being reached:

    "The HCDC is interested in the process costs that were targeted at each option. Can you clarify the extent of the costs the department incurred throughout this process? How much was spent supporting the company proposals, including direct or indirect payments to the companies, and how much in support of the in-house option, in-house to include the costs of producing the management benchmark?"

  Possible supplementary questions:

    "How can this imbalance in the resource allocation against each option lead to you being confident that a sound Value for Money judgement has been reached? Surely the preparation of an inadequate Public Sector Comparator (PSC) has meant that the judgement is far from sound?"

    "The companies appear to have had a risk free journey through this process with the MOD underwriting the costs of their bids. Does this not show a lack of commitment on their part that they could actually undercut the existing naval base costs let alone a sound PSC?"

    "Why was it felt necessary, in the case of BRDL at least, to fund their bid indirectly through the overheads attached to MOD contracts as opposed to direct payment? How was this monitored and controlled?"

  12.  The question also requires asking of the role of the NAO in auditing the process and the secrecy behind their report. We were informed at the time that the NAO had been invited in a Non-Executive Director of the Warship Support Agency (WSA) board to carry out an audit of the process and give the board confidence in the outcome. When we asked for sight of this at WSA and Defence Logistics Organisation (DLO) level it was refused. When we asked at ministerial level it was refused because it was "advice to Ministers".

  13.  The Unions are not happy with this and neither should the HCDC be. It is suggested that a question along the following lines be asked:

    "The NAO were invited to audit the process by the WSA Management Board. Did the report endorse the process in total and class it as providing a sound basis for making a value for money judgement? Can the HCDC have a copy of the report as it will come into the public domain in the future NAO review of the outcome?"

EVALUATION

  14.  The Unions made it clear to S of S that we did not believe that the BENCHMARK would stand scrutiny as a PSC because it did not compare like with like. It was constructed in a different format to that asked of the Companies and through the constraints of time and resource and as discussed above, without the depth of thought.

  15.  We were also concerned that evidence showed that the Unions' proposals were given only a cursory examination.

  16.  The question to be asked on this issue is how the MOD could evaluate the worth of two uniquely different proposals—the company proposals based on output specifications and the TU alternative on a cash basis.

    "As the company proposals were drafted against output specifications and the Unions' alternative submitted on a cash basis how can the MOD be confident that a competent evaluation of these two very different approaches was made?"

  Possible supplementary questions:

    "The Unions submitted a 92 page document and received a two page response. They are rightly concerned that their positive alternative proposal wasn't properly evaluated. Has there been a full evaluation of the proposals including findings and costings? Can the Committee be furnished with copies?"

  17.  To try and counter the Dockyard Sales Agreement link the Unions submitted an alternative partnering proposal that also involved the Shipbuilding companies. There is no indication that the MOD gave this proposal any serious thought. It is worth requesting CE WSA to explain MOD's views of those proposals.

    "The Unions tabled an alternative partnering proposal as part of their submission. Could you explain why this was ruled out and give a rough idea of how the costs measured up?"

  18.  A major aim of the MWMI was to resolve the over-capacity problem affecting the surface vessel refit environment. The question has never been asked how this proposal achieves this. As the main customer of the Dockyards, CE WSA has been heavily involved in negotiations and discussions on this very issue and should be the expert on it.

  19.  It has been made clear that the overcapacity is in the number of dry docks in the country and that this is to get worse as the navy moves to even more Reliability Centred Maintenance carried out afloat in naval bases. This proposal simply transfers staff from the public to the private sector and significantly cuts their number but it does not address how the number of refit facilities is to be reduced to resolve that overcapacity problem. It should be interesting to hear the MOD view on that.

  20.  A probing question could be:

    "A major plank of this initiative was aimed at solving the overcapacity problem affecting surface vessel refit facilities. Can you explain the extent of that problem i.e. how many docks presently exist and how many does the MOD believe will be needed to meet future fleet refit requirements?"

  Possible supplementary question:

    "How do the proposals in the MWMI address the overcapacity issue?"

  21.  The lack of consultation on the decision has left a significant number of grey areas. One in particular being the assessment of risk against the two proposals. The trades unions believe the risks against the company proposals were understated and those against the Unions' proposals overstated. CE WSA should be asked to explain how the risks in the Unions' and the companies' proposals were evaluated. That the contract is based on a Target Cost Incentive Fee arrangement the same as the D154 project at Devonport is an indication that the risks against the company should not be taken lightly as the MOD will foot the bill.

  22.  A possible question down this line could be:

    "How were the risks against each proposal assessed? Surely the Unions' proposals would have the minimum of risk against the dangers inherent in the Companies' proposals. If the company cannot make its target shareline and asks for more money what option does the MOD have but to pay it or throw the services of a naval base into turmoil?"

  Possible supplementary question:

    "The Unions' proposals must have offered earlier even in-year savings at a lower risk. Why was this discounted?"

SAVINGS LEVELS

  23.  At the start of the process the figure of £200 million was quoted as the expected savings from the MWMI as opposed to paying the Dockyard Companies £30 million compensation because of the requirements of the Dockyard Sales Agreement. The final announcement states savings in the region of £300 million now being expected.

  24.  We find that figure quite incredible especially as, since the initiative started two years ago, there have been actions taken with the allocated work programme that should have reduced that figure. DML has been getting non-refit related MOD contracts to offset gaps in the allocated work programme and BRDL have been given the Frigate and Carrier refit orders. DML and BRDL's allocated work programme runs out in 2003-07 respectively. As the aim was to take work from the expensive allocated work programme and put it out to tender it looks unlikely that events since the MWMI was launched or the delay in taking it forward should have resulted in increased savings. The MOD should be asked to explain how these figures were arrived at.

  25.  Possible questions down this particular path include:

    "The HCDC is interested to know how, in light of developments since the MWMI started that have reduced the scope for savings from switching work from the allocated to the un-allocated programmes, the projected savings of £200 million has become £300 million?"

  26.  Something that has not been made clear is the apportioning of the savings. The announcement detailed that "The savings compared to the baseline are over £300 million, approximately half from the renegotiation of the repair programme, and the introduction of improved maintenance techniques, and half from partnering at the Naval Bases".

  27.  It is worth pointing out that the naval bases were at the forefront of pioneering the improved maintenance techniques discussed above and we suspect that these are savings that would have been made despite Partnering not because of it.

  28.  The MOD has been adamant to date that the savings related to the Dockyard Sales Agreement are commercial in confidence and cannot be released. This confidentiality should not apply to the introduction of improved maintenance techniques nor the naval base efficiencies. It is important that the MOD explains publicly what is expected from each naval base in the way of savings and how each proposal compared in these areas.

  29.  The main question to be asked on this issue is for a breakdown of these projected savings in total and against each naval base.

    "What was the final breakdown of the two proposals from a naval base efficiency perspective and what are the differences in savings between the Naval Base benchmark, the Companies' proposals and the Unions' alternative at each of the Naval Bases?"

  Possible supplementary question:

    "What level of savings are envisaged from the introduction of improved maintenance techniques at each naval base? Were these not savings that would have been made anyway as the bases were already pioneering this type of engineering practice?"

VALUE FOR MONEY

  30.  The Unions are concerned that the business case produced by the MWMI IBT did not paint the whole picture.

  31.  Negotiations are still ongoing regarding the transition towards vesting day so the total costs are still not known. The due diligence process is also ongoing. On the Clyde, for example, this means a flood of contractors coming on site to review the asset holdings and populate an asset management database. This itself will be a significant cost but, on top of that, BRDL will be unable to complete their final projections until the due diligence process has been completed. Has the business case taken account of these additional costs and possible outcomes?

  32.  The MOD and the companies are saying that they cannot quantify the number of job losses that will result yet redundancy payments will have been included in the business cases. The Unions are concerned that the IBT may have assessed the redundancy bill as cost neutral because that would not be the case. The Unions' case did not forecast the amount of job cuts being predicted in the Partnering proposals. Greater savings would be gained from earlier implementation of job reductions and not filling vacant posts. Equalising redundancy costs across the two options would, therefore, give a skewed forecast of the benefits from the company proposals in the business case.

  33.  The issue of the almost 300 gapped posts transferring to the private companies across the three naval bases also causes the Unions concern. The Unions' proposals called for discussions on not filling gapped billets through a process of restructuring and delayering. This would have meant instant savings in this financial year. The MOD seems intent on transferring the funding of these vacant posts to the private company. If true this would build in additional costs from this financial year, take staffing flexibility away from the MOD and allow the company early gains in their quest for profit at the taxpayers expense.

  34.  The remaining MOD structure has not yet been developed to relate to the company structures being set up. This could result in the creation of more jobs in the intelligent customer and contract-monitoring role. The business case should have also included the costs of the MOD retained structures.

  35.  The provision of Service Personnel being seconded to work for the company but the company being allowed to charge a nominal sum for that work leaves the MOD holding the major overhead related to service personnel while allowing the company to distort the costs of work being carried out. The Unions do not believe that will provide best value for money for the taxpayer.

  36.  Relevant questions on the Value for Money issue include:

    "As there are a number of outstanding issues to be resolved to take forward Partnering in the naval bases. Issues such as final negotiations on the in-scope/out of scope posts; the outcome and cost of the due diligence process; the funding of vacant posts being transferred and the structure of the retained MOD areas all have cost implications. Until these are resolved how can the department be confident in the business case?"

  Possible supplementary questions:

    "When are the negotiations on which posts are in and which out due to be completed?"

    "How much longer is the due diligence phase due to last and how much is it going to cost in total including the costs of the contractors assisting in asset tracking?"

    "It is understood that there are upwards of two hundred vacant civilian posts across the three naval bases being transferred to the private company."

    "How is the transfer of these gapped posts being managed?"

    "Will the funding transfer? If so does that not mean an immediate increase in costs to the MOD as the funding of these posts can at present be flexed across budgets to cover staffing contingencies and a reduction in flexibility for the MOD staffing process?"

    "Does it not also mean an immediate profit to the private company?"

    How is the use of service personnel seconded to the private company expected to work under partnering?"

    "Do you think that it is a good idea that service men and women in shore billets will be expected to work in a commercial environment to make profit for a private company?"

    "What is the charging regime? Does that not leave the overheads with MOD and allow the company to charge deflated rates for contract work?"

IMPLEMENTATION:

  Including the lack of an attempt as justification through consultation, nuclear safety issues and affordability.

  37.  The Unions are angry that Min(AF) has exercised his prerogative not to consult on the decision. The MWMI process has severely damaged the industrial relations in the department and continued failure to properly consult and justify the decision will simply compound the growing mistrust of staff in their employers.

  38.  There are also concerns about how the Nuclear Industries Inspectorate (NII) requirement for direct control by the Nuclear Authorisees, the NBCs, which will necessarily be diluted under the proposed partnering arrangements, will be met. The department is working on the assumption that the NII and their own regulator CNNTRP will endorse the proposals. That endorsement has not yet been received.

  39.  Finally there is the affordability issue. The WSA as part of the DLO and wider MOD has serious underfunding problems in FY02/03. It is thought that the Partnering proposals will require significant investment in years one and possibly two. A number of important Business Change initiatives have been cancelled because of that underfunding yet this initiative that could be extremely expensive to implement carries on. The question has to be asked why? Why, when the MOD was presented with a low risk, value for money, public sector alternative does it insist on taking forward the high risk, expensive to implement private sector proposal?

  40.  There are a number of questions that can be asked on value for money:

    "Why is the MOD so unsure of the decision that it refuses to consult on how it was arrived at?"

    "Does the MOD understand the damage this process has done to industrial relations across the whole department?"

    "Where does Partnering go if the nuclear regulators believe that the fragmentation of the naval bases threatens the nuclear command and control links and does not give the proposals their endorsement?"

    "Is it not the case that the Partnering option will cost money in the first year at least and in subsequent years redundancy costs will mitigate against any savings?"

    "Why, when the MOD was presented with a low risk, value for money, public sector alternative does it insist on taking forward the high risk, expensive to implement private sector proposal?"

PERSONNEL ISSUES

  41.  As service personnel and some civilians can be seconded to the company and the company are now talking about seconding staff back into the MOD during slack periods staff are asking why anyone has to be TUPE transferred. Secondment would allow the same processes to be taken on under Partnering but would allow a process of staff transfer that would benefit all parties.

    "The issue of secondment rather than TUPE transfer was raised by the trades unions but met with opposition from the companies. Did the MOD give secondment serious consideration and why was it discarded as an option?"

  42.  The Unions raised the staffing problems identified under the conclusions of the Maritime Logistics Sustainability study with S of S. i.e. there would be insufficient staff left in the MOD to sustain that support. Has this been considered in the evaluation process?

    "As the Maritime Logistics Sustainability study concluded that there would be insufficient staff left in the MOD to sustain maritime logistics support should Partnering including transfer of staff to the private companies be taken forward why is it the recommended way forward?"

  43.  The Unions also raised with the S of S the longer term issue of maintaining the intelligent customer capability otherwise referred to as the corporate knowledge base as well as a skilled workforce. With the use of naval personnel to supplement the civilian workforce employed by the companies during times of tension and/or a transition to war situation service personnel may well be required for front line duties. Given the reliance by the companies on a service aspect to their staffing resource, the Unions believe this poses potential difficulties in maintaining support to the fleet at a crucial time. This is especially important given the move to Reliability Centred Maintenance regimes. Similarly the requirement for a skilled workforce becomes even more crucial in terms of ensuring quality of repair and refit work, but it is evident that at least one of the dockyard companies has experienced a severe skills shortage in the last year or two. Possible questions arising from these points are as follows:

    "What provisions will there be to supplement the companies' civilian workforce during times of tension and transition to war with the potential for service personnel seconded to the companies being required for front-line duties?"

    "Are there provisions within the contractual undertakings between the companies and the MOD to ensure that the companies maintain a skilled workforce including the training of apprentices?"

    "How is it intended to maintain the intelligent customer capability to ensure continuing value for money and delivery of quality during the initial period of the contracts and beyond in the event they are extended for a further term?"



 
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