Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 20-39)



  20. Are the overruns in general due to a poor estimate at the beginning of what the cost is going to be or a poor estimate of the technological problems and so on which you are going to have to overcome?
  (Sir Robert Walmsley) I would say this would I not? It is a bit of a mixture. I do not shelter behind saying the estimate was wrong, although there are some cases when clearly that is the case. There is a number of pseudo technical issues which we need to pay more attention to. One of them is integrating with other systems. Sometimes you find that nobody has funded the interface properly. You have two projects, a missile project and an aircraft project and there has to be a handshake between them, a technical, very detailed handshake. Sometimes we end up having to pay more attention to putting money into what it would cost to achieve that handshake than I feel comfortable with. The other point I have to try to get across is that once we have placed a contract with industry, we are doing this—even on extraordinarily advanced work—on a fixed price basis. Very rarely, very rarely, do we move away from that. What that means is that if industry do not think it is sensible to undertake on a fixed price basis, then they probably will not want to start. That is some protection against us getting into terrible trouble in the wake of the Main Gate decision. That is partly why our cost control is not too bad by comparison with other countries.

  21. Looking at Table 2 on page 5 it seems that a huge proportion of the cost overrun is accounted for by a very small number of projects. Is it the particular nature of those projects, the Tornado Mid Life Update and Merlin and so on, or is it the Eurofighter, or is it that these really big procurement projects always run into big problems. When you are building a new fighter plane, you do have big overruns, huge delays, that is just the nature of these very big procurement projects.
  (Sir Robert Walmsley) It would be easy to say that because that is the evidence, but it is my job to try to bust through that and if you look down here you will see some really quite big programmes where the cost has not been the trouble. That does not mean there are no problems with the projects. As I look down at the bottom of this list I can see some huge programmes, Nimrod, £2.5 billion, Astute, £2.5 billion and Apache which is £2.5 billion. These are all astonishingly advanced things and the cost is okay. It is back to this fixed price contracting, but I do not want to conceal from the Committee that there are issues about fixed price contracting for development, that is to say R&D orientated programmes. There are issues in there which we are going to have to face up to sooner or later.

  22. It says in paragraph 1.15 and indeed in Figure 6 on page 9 that the newer projects—and this of course is what you want to be able to demonstrate—show less cost overrun than older projects. With the heavily overrunning projects like Eurofighter, when did the real cost overruns start to occur in the project? How many years after the thing got going did the big cost overruns begin?
  (Sir Robert Walmsley) It is always quite difficult to work out when Eurofighter really began, it is so long ago. One can see that the experimental aircraft programme was taking place in the mid-1980s and it is true to say that the big cost overruns started to become apparent in the early 1990s. I am rounding an awful lot of things when I say that but six or seven years in. You are absolutely right in the implication of what you say, which is that all projects go well to start with.

  23. You got there ahead of me. I just want to know how confident you can be relying on this evidence, just because in the first couple of years some of these projects have not started to overrun. In the history of defence procurement do you find it is normally the case that the problems emerge later on?
  (Sir Robert Walmsley) Yes; absolutely. I just come back to my contracting point. If you look at Figure 6 and you see Merlin Mk 1 over to the right, three aircraft crashed during the development programme and we had to pay for that. I do not just mean pay the cost of the aircraft, we had to pay the cost implications of stopping the flying development programme. Even worse than that, we had a very poor variation of price clause in the contract which was absolutely standard at the time, which was that you look at the cost of material index and the cost of labour index in the aerospace industry and, even worse, in just the helicopter part of it, and every year you allow the price to be adjusted on the basis of those indices. Those indices typically ran twice as fast as inflation in the community at large. What that meant was that relative to the defence budget this project was getting more expensive at the rate of 2.5 per cent per annum or thereabouts. Year on year on year Merlin's costs grew just as a result of having these variation of price (VOP) clauses and we bought that out a few years ago and just eliminated it. So I paid a great penalty in appearing before this Committee some years ago when the Merlin project costs had jumped up and that was me buying out the VOP clause and it has gone now.

  24. Some of these projects seem to run years and years, decades even, behind schedule. When do you take the decision to pull the plug on a major defence procurement project? When was the last?
  (Sir Robert Walmsley) We sometimes take it because we are unable to secure a collaborative agreement. When you are trying to collaborate with two or three countries, that may be just about possible, but we collapsed the Horizon frigate programme and are producing a national ship. The requirement continues to exist and we are satisfying it nationally. A very difficult decision was the TRIGAT Medium Range Anti-Tank Guided Weapon on which we were unable to secure all the nations' signatures; held up by Holland and Belgium. Germany, France and we had signed. No signature, no programme. Probably about four or five years before that, the United Kingdom had walked away from a Long Range TRIGAT. So there are examples of when we have cancelled procurement. There are other examples where we kept bashing away but had to alter the procurement strategy completely, of which the most notable recently was Bowman.

  25. What about Eurofighter. Are you completely confident that Eurofighter is all it is cracked up to be and are you delighted it is all proceeding and that this is the fighter plane you are going to get?
  (Vice Admiral Sir Jeremy Blackham) I am delighted it is proceeding certainly, not least because it is a marked improvement on the aircraft which is currently in service. Yes, I am pleased that it is proceeding. As always with defence requirements, I should like it quicker, but I am satisfied that the programme is being managed properly and I am sure that the aircraft we get is going to be a great improvement. Perhaps I should go beyond that. It is not just the aircraft, it is the aircraft and its systems.

  26. How will it mesh in with the Joint Strike Fighters? Are they completely different? They are both fighter planes basically, are they not?
  (Vice Admiral Sir Jeremy Blackham) No, they are not. The fundamental point is that they are completely different aircraft, which is why we are procuring them both. The Eurofighter is currently designed to be predominantly a superiority fighter. That is the role for which we originally envisaged it and it is a role for which we are procuring the first quantity of aircraft we are procuring. It is optimised for that role. The Joint Strike Fighter, although it is called a fighter, is very much more an attack aircraft and it is designed to deliver weapons on targets. It has been particularly designed to operate on aircraft carriers which is the role for which we particularly want it.

  27. Is air superiority, presumably against other fighter planes, still regarded as a likely combat scenario where you are going to have to maintain air superiority? In the current conflict in Afghanistan there were a couple of rusty MiGs and they were dealt with in the first few hours and we did not really need an air superiority fighter. In what sort of scenarios do the military envisage needing this kind of aircraft?
  (Vice Admiral Sir Jeremy Blackham) We have a range of scenarios, as you would expect. At the top end of those are scenarios involving our most powerful potential adversary. Clearly we have to monitor their capability and we are here ready to deal with it should the need arise. The relative likelihood of that and the relative likelihood of the lower level things mean that from time to time we may want to vary the balance in our procurement. We would be very foolish not to provide against the highest level of capability we could conceivably find ourselves facing.

  28. I am tempted to ask who you regard as the adversary you are most likely to face.
  (Vice Admiral Sir Jeremy Blackham) The highest level capability which we could face self-evidently is that of Russia.

  29. You still measure against Russia.
  (Vice Admiral Sir Jeremy Blackham) We measure ourselves against the highest potential adversary we could face and that clearly and non-controversially has to be Russia.

Mr Gardiner

  30. Many things in this report are good and I recall your remarks about 18 months to two years ago saying that Smart Procurement, as it was then, was going to revolutionise the way equipment came into service and the cost thereof and so on. How do you account for the fact that there has been a five per cent drop this year in the achievement of the key user requirements from what you predicted last year? That must be a source of some consternation to you because clearly it means that the equipment which Sir Jeremy had hoped to have is going to be five per cent less effective than he had hoped it would be.
  (Sir Robert Walmsley) I hope that will not be the case but that is rather a complicated point to start with. The first thing to say is that in one sense—and I do not mean this as a trivial riposte—I am quite pleased, because I have been worried, and I may have said to this Committee before, that our assessment of key user requirements was sometimes done solely by the people actually manning the project team itself. There was a sense therefore of marking one's own homework. We are now as part of Smart Procurement and emphasising the role of Sir Jeremy as a customer having to justify to Admiral Blackham's people why it is that we know we are going to meet the key user requirements. I think there is a more rigorous scrutiny of the evidence, that we are actually going to do it. A second point on the detail of this is that four of these arise with one project. I am happy to say that as we sit here today that number would now be down to three and of those three I could say they are 90 per cent met; it is not a black or white situation. We are just on the cusp of moving in to saying probably another two are just about there and I agree there will be a difficulty with the fourth. In another project which has rather curiously been in service for a great many years, I absolutely acknowledge that there is a need to pay more attention—this is marking our own homework, getting out of that difficulty—to one aspect of the key user requirement. Nothing has changed with the weapon, it has been in service for a long time. Probably as a result partly of increased attention to a slightly different scenario in today's operational environment we are missing it, so we have been marked down. That is where five of the key user requirement shortfalls came from. Although I am very disappointed not to be doing what I was contracted to do, I am pleased that we are taking this tougher view of whether or not we are going to deliver equipment which meets the key user requirements.

  31. Let me push you slightly on that. Last year when the 2000 report came out we were already in Smart Procurement, one would have hoped that this tougher mode of assessment was already in place. I take your point that you are not marking your own homework here, it is a much more rigorous assessment. Surely that should have been reflected in the targets you set in the report last year.
  (Sir Robert Walmsley) I think it was and the target on meeting key user requirements for the Defence Procurement Agency is tighter this year than it was last year. They are continually being tightened and we shall still just about scrape home. To come back to the detailed point, the most obvious delinquent in this aspect of the procurement is one project with four which are currently assessed as failing. I also said that projects always go well to begin with but it is just true of some weapons programmes that until you actually come to test them for real you do not absolutely know whether something is going to meet its requirement or not. Maybe we had been a little optimistic. When we came to test it for real it did not satisfy the requirement and I have explained that we have fixed one of those four problems.

  32. I do not want to focus on ASRAAM because that is going to be a separate report to this Committee. Can we look at paragraph 1.28 where it says "Change in the customers' requirement flowing from changed budgetary priorities are the reason for non-achievement of the remaining 3 of the 12 Key User Requirements". Cash that out for me. Why is it changes in budgetary requirements which have resulted in that failure?
  (Sir Robert Walmsley) I am going to ask Admiral Blackham because it is budgetary priorities and the report explains somewhere else that Admiral Blackham, the customer, can take a different view of what really matters to him. Things change, circumstances change. I really ought to hand over to him.
  (Vice Admiral Sir Jeremy Blackham) It is worth dwelling for a second on this. During the period up until about the mid-1990s when there was a degree of stability about the nature of the threat and what we thought we might be going to face and deal with, it was relatively easy to specify the sort of equipment capability you wanted. By and large it was not tested either, not in combat. It was tested in the sense that Sir Robert has already discussed but you had a degree of stability. In the last few years we have been operating regularly; we have been operating in places we had not expected to operate in, we have been learning lessons from those operations, technology coincidentally and simultaneously has been developing in some areas very fast indeed, a generation perhaps being 18 months in some of the information and communications areas. We have had to look at our priorities. It touches slightly back on the answer I gave Mr Osborne about the potential threat. We have to juggle these things. It may well be that either the nature of the operations with which we are faced or the lessons we learn in those operations cause us to review our priorities for the delivery of particular equipments. We will therefore change our view and we may indeed revise the requirements as well in response to what we have learned. It is perhaps also worth saying, where there has been an escalation in costs in something, let us assume there has been escalation in costs in something for a perfectly reasonable reason, then that may well have to be dealt with by looking at the budgetary priorities and deciding how to deal, in the short term at any rate, with that escalation. There is going to be a degree of change in our requirement which there was not in the days of the Cold War.

  33. As I understand it you have given me two reasons. What I want to do is get at which has driven these three failures to meet the key user requirements. The two reasons I understood from what you said were that you have actually been in operation in a number of theatres you did not anticipate, that has honed your thinking about what operationally is going to be effective and worthwhile and in that sense what you might properly say is that these are not changed budgetary priorities but changed operational priorities. You have been in a theatre where it is clear to you that something is more or less important than it once was. The other side of what you said was that there are changed costs and at the point where costs escalate sometimes for perfectly good reasons, as you said, you had to take a decision as to whether it is worthwhile pursuing it at that new cost. Which has actually been the key determinant for the three key user requirements of the 12 here?
  (Vice Admiral Sir Jeremy Blackham) I just want to make sure I am on the same page as you.

  34. This is page 13, section 1.28.
  (Vice Admiral Sir Jeremy Blackham) I am not sure it is easy to define it in the way you have suggested. The first thing I would want to say is that for me operational priorities and budgetary priorities come to be the same thing. The reason they come to be the same thing is that I am responsible for producing the financial plan to meet the operational requirements so that where an operational requirement changes, that will almost inevitably necessarily require me to change the budget and the planning I write.

  35. Yes, but what I understood from what you said was that we have had experience in theatres which will change our assessment of something we have identified as a key user requirement. We also have situations where costs, perfectly reasonably and for other reasons, have escalated and that has then caused us to look at that and make a decision about whether what we had identified as a key user priority is worth it at that new price. What I am trying to get out of you is which of those three have come primarily from operational re-thinking and which have come from a re-assessment given an escalation in price?
  (Vice Admiral Sir Jeremy Blackham) I am looking at paragraph 1.27. Is that correct?

  36. I was looking at paragraph 1.28, but we are on the same page; we are almost there. (Vice Admiral Sir Jeremy Blackham) In the case of Eurofighter, we have concluded that we can afford to negotiate over the landing distance as that is no longer a key user requirement which is being met. That has been agreed between my organisation and the supplier organisation. In the case of ASRAAM, we actually want the full requirement sooner or later but we have been prepared to accept that given the current threat we most likely face we can afford to accept a slightly lower requirement in the meantime whilst developing a route map to the full requirement should we need that. I am obviously not understanding your question.

  37. Perhaps you could give us a note trying to break it down.
  (Vice Admiral Sir Jeremy Blackham) Yes; certainly.
  (Sir Robert Walmsley) On the three.[1]

  38. Yes, please; specifically on the three. I do not want to look at the technical side of it, simply on what were earmarked as the budgetary changes. Can I take us to page 5 and the footnote? Let us look at Figure 2 first. Would you agree that really MRAV at the bottom, the 22 per cent underspend forecast, is actually good luck because of the Dutch coming in or not good luck but jolly hard work on your part.
  (Sir Robert Walmsley) I have to say that I rather agree with Prime Minister Canning who had a poem about the Dutch which I shall not recite now but that is certainly what it felt like. I regard that as a Battle of the Somme having been won.

  39. A real success. Let us go down to the footnote at the bottom of the page. What would Figure 3 look like without the re-basing of the MPR 2000 approvals?
  (Sir Robert Walmsley) I am over on to Figure 3 on the next page.

1   Ev 17, Appendix 1. Back

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