Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 100-115)

SIR ROBERT WALMSLEY KCB AND VICE ADMIRAL SIR JEREMY BLACKHAM KCB

MONDAY 10 DECEMBER 2001

  100. Are you going to buy the same number of missiles?
  (Sir Robert Walmsley) Yes.

  101. Paragraph 12. You have been very gung-ho about Smart Acquisition and there have been various gung-ho comments from Ministers about Smart Acquisition. But this is not such a happy saga is it?
  (Sir Robert Walmsley) No.

  102. Are we going to be smarter about the way we do things in future?
  (Sir Robert Walmsley) I am troubled by this. It is back to this issue of whether a fixed price contract is the proper vehicle for pushing the boundaries of what is technically possible. In the United States they would not contemplate it. They would just say that there is no sensible way in which you can set a price for something when you do not know how you are going to achieve it. We say companies freely enter into these bargains, they do not have to take the contract if they do not want to, and therefore we have handed over the cost risk to them. That is what has happened in this case. ******. That makes every single argument, every discussion, every sensible response to a problem more difficult than it should be. We have had the benefit: I have just told you that the cost has gone down; that is true. We have also had the trouble: which is that resolving the issues has not been capable of being responded to by us coming to an agreement and putting in more money.

Mr Steinberg

  103. Paragraph 3 says that ASRAAM first ran into technical difficulties some five years ago. Why have these difficulties not yet been resolved? Why has it taken so long?
  (Sir Robert Walmsley) What happens if you have a problem with a test firing is that the engineers look at the telemetry, the results of the firing, analyse it in great detail, try to simulate the fault in the laboratory and then try to put it right on the next firing. They did that a few times and that is why I said we may have been confused by brilliant explanations as to what went wrong into thinking that was reasonable. Then actually consistently over a period of a couple of years these test firings did not come through on time.

  104. Even so, five years seems to be quite a long time to put the mistakes right.
  (Sir Robert Walmsley) To characterise this as a mistake which can be put right would be in one sense a brutally exact description but the idea that this can be put right just by saying turn that switch from on to off . . . This is hundreds of the best engineers in Europe working as hard as they can to try to do one of the most difficult things, which is an air-to-air missile.

  105. It makes you think that right at the very beginning there was something very sadly wrong if that is the case? If you are saying it has taken hundreds of technicians five years, then the original plan must have been way out. Who was responsible for accepting it in the state it was in when you first got it?
  (Sir Robert Walmsley) I accept the responsibility, though I was not around at the time; that is the way it works. ******. They have even foregone bonuses that we tried to put in to encourage them to do it on time and they did not deliver and they did not get the bonus. We have taken inflation out of the contract. We have done all sorts of things and now it is coming good in my view.

  106. Paragraph 4 says that in April 1999 Matra BAe Dynamics advised the Department that it could not meet the missile's requirements by December 1999. Why had the Department not picked this up?
  (Sir Robert Walmsley) We had. We went to the company in 1996 and asked why the test firing had not occurred properly in the United States. We then went into the scenario I explained and they said this is why it did not take place and this is what we have done to put it right and a few months went by and lots of engineers worked on it, they tried test firing again, that did not work, that again was explained satisfactorily. Our in-service date then was December 1999, delivery of 60 missiles. We kept saying to the company that we did not think they were going to make it. That has a very serious impact on a company's business. They hang on and it was not until April 1999 that they admitted they could not deliver. It did not mean we did not have suspicions; absolutely the very reverse. We were confident that they were not going to make it.

  107. It always amazes me. Earlier with the report I was talking about cost reductions and the fact that figures just seem to appear from nowhere. If you read on in paragraph 4 it says, "The Department collected £4.4 million in liquidated damages from the contractor for late delivery". How was that figure arrived at? Was it just picked out of the air?
  (Sir Robert Walmsley) No. You can approach damages in a number of ways. One of the purist ways is to say you would like to be put in the position you would have been in if the contract had been executed properly. If you can estimate the loss you have suffered as a result of the contract not being executed properly, then you can demand the money. If you try that route, it takes a great deal of time usually. What we try to do is to have a formula which relates the damages quite explicitly to months late payable at a certain proportion, usually one half a per cent of the contract price, usually for a period not exceeding 12 months, adding up to a total of six per cent and there is usually a period of grace of a couple of months at the beginning. In this case, there will have been a formula which turned the damages into liquidated damages which means you do not have to go arguing about them in the courts years afterwards, but you collect them as they fall due. That is how this has worked.

  108. Is the figure of £14.6 million from the contractor in return for putting back delivery of the missile arrived at using the same sort of formula?
  (Sir Robert Walmsley) Wherever you have a change to an existing contract it is always non-competitive. ******.

Chairman

  109. I received a letter from Lord Bach today dated 5 December which arrived in my office only this morning about Storm Shadow. I do think it is very unfair on the Committee that these letters are sent to us. It had to be put on the table for Committee members. Could you take that back to your colleagues?
  (Sir Robert Walmsley) You mean so shortly before the Committee.

  110. Yes. There was no chance for us to read it.
  (Sir Robert Walmsley) I just wanted to understand the point.

  111. It is not fair that this letter reached me this morning.
  (Sir Robert Walmsley) I have to say that is my fault and I will take the message back. I shall also bend over as I give the message.

Mr Williams

  112. Why is it that the Minister wrote to us instead of you? You were the witness coming here. Would it not be you or Sir Jeremy who would normally write to us?
  (Sir Robert Walmsley) I think there is a convention that I do not disclose the terms of my advice to Ministers, but if that is wrong, then I am happy to be corrected. I do not think any thought was given to me approaching the Committee. I would have been quite happy to do so. I think it really parallelled what previous Ministers have done when they have wished to make something clear to either the House of Commons Defence Committee or to this Committee.

  113. Would you not have wanted to make it clear to this Committee?
  (Sir Robert Walmsley) Yes, I would have done.

  114. In that case why did the Minister need to write? You are coming here as a witness. I do not understand the situation. It seems rather strange for a Minister at a political level to come in. We normally keep Ministers out of our deliberations and they are happy for it to remain that way. So why is a Minister suddenly parachuted in to our hearings very late with a request which seems not unusual as a request but it would not have seemed any different coming from you.
  (Sir Robert Walmsley) I can explain the "very late". The "very late" is because the negotiations which support that letter were only concluded with the company a matter of days ago. ******.

  115. ******.
  (Vice Admiral Sir Jeremy Blackham) ******.

  Mr Williams: That is all I was interested in. I still do not understand why the Minister wrote to us instead of yourself.

  Chairman: Any other questions? Sir Robert and Sir Jeremy, thank you very much for answering our questions. We are very grateful.





 
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