The Major Projects Report 2010 - Public Accounts Committee Contents


Supplementary written evidence from the Ministry of Defence

QUESTION 136—NOTE ON THE CARRIER PROCUREMENT

The contract to build two Queen Elizabeth Class (QEC) aircraft carriers was signed in July 2008 and is being delivered by an Aircraft Carrier Alliance (ACA) consisting of MOD, BAE Systems, Thales and Babcock Marine.

The baseline cost for building two carriers, pre-SDSR, was reported in MPR10 as £5,900 million, excluding Assessment Phase costs and including cost of capital. Removing cost of capital and adding back Assessment Phase costs gives the MPR10 Capital DEL baseline cost of £5,254 million. The agreed Final Target Cost (FTC) position (post MPR10) is slightly lower at £5,241 million. Agreement of FTC is a key point in the QEC contract as it sets the parameters against which the ACA's final cost performance will be measured. These figures exclude any costs arising from SDSR decisions on the Carrier programme.

The cost for building the first carrier only (HMS QUEEN ELIZABETH) was assessed during SDSR as £4,275 million, which was £979 million lower than the equivalent MPR10 baseline for building two carriers (this equates to the roughly £1 billion saving explained at the Hearing). This was based on assessments made by MOD cost engineers and an external consultancy team working independently of the MOD project team. The savings represent cancellation of approximately £1.3 billion worth of programmed expenditure for the second Carrier (HMS PRINCE OF WALES), together with receipts from the sale of surplus equipment, offset by some cost increases due to, for example, loss of economies of scale on HMS QUEEN ELIZABETH and additional VAT payments that become payable on expenditure to date for the cancelled Carrier (VAT exemption only applies to completed ships).

If we had decided to cancel both the Carriers and immediately cease all build activity, the costs were assessed during SDSR to be in the region of £3,156 million, or £2,098 million lower than the equivalent MPR10 baseline (this equates to the roughly £2 billion saving explained at the Hearing). This is based on internal MOD estimates. The savings represent cancellation of approximately £2.8 billion worth of programmed expenditure for both Carriers, together with receipts from the sale of surplus equipment, which is then offset again by VAT payments that become payable on project expenditure to date.

In terms of the carrier contract itself, therefore, cancellation of either one or both carriers would have saved broadly £1 billion or 2 billion in total respectively.

However, as the cancellation costs would have had immediate effect, the costs in the short term would have been significantly higher than proceeding with both carriers as planned; nearly £1 billion more in Financial Year 11/12 if both carriers had been cancelled.

In making its SDSR decisions on the carriers the MOD also had to take into consideration the wider impact on the UK warship industry. Put simply, if one or both of the carriers were cancelled, and if the Government wished to retain a UK capability for the design and manufacture of complex warships, then alternative replacement work would need to be found. Or, the Government would be faced with the costs of industrial rationalisation. These rationalisation and redundancy liabilities pre-dated the carrier contract (and the later Terms of Business Agreement) and arise from the mandated Treasury Yellow Book costing rules.

Although often linked, it is important to stress that the decision to build carriers has always been separate to the decision to sustain a longer term UK warship building industry that was the rationale behind the agreement to the TOBA.

BAE Systems Surface Ships (BAES SS) Terms of Business Agreement (TOBA)

The TOBA, signed in July 2009, provides MOD guarantees to BAE Systems of a minimum level of ship build and support activity of around £230 million/year. This level of work was independently verified as the minimum level of work possible to sustain a credible warship building industry in the UK. The TOBA has been designed to incentivise major reductions in the size of the industrial base on a managed basis to minimise the rationalisation cost for which MOD was already liable under historical Yellow Book rules.

The TOBA can be cancelled at anytime. Cancellation crystallises the extant rationalisation costs, leaving MOD liable for remaining industry closure costs and compensation to BAE Systems for their lost investment. During the SDSR, cancellation of the TOBA would have been expected to cost in the order of £630 million. A key element of the TOBA is that it ensures that this figure reduces year on year against an agreed formula and bounds MOD's liabilities.

Related programmes

The financial impact on other related programmes such as the Joint Strike Fighter (JSF), and Type 26 Global Combat Ship (GCS) has also been excluded here, but was taken into account in the decisions taken during SDSR.

QUESTION 141—SENIOR RESPONSIBLE OFFICERS

The Department has already stated, in response to a Parliamentary Question, that determining whether there had been a gap in succession of Senior Responsible Officer (or equivalent) for all thirty projects in the MPR, some of which were initiated many years ago, would incur disproportionate cost. We will provide this information in response to the Committee's request, but it will take some time to do so, and we aim to provide it by the end of January 2011.

QUESTION 146—DEPARTMENTAL PRESS OFFICERS

The answer to the Parliamentary Question on press officers, which was answered shortly after the hearing, was as follows:

20 Dec 2010 : Column 986W

DEPARTMENTAL INFORMATION OFFICERS

Stephen Barclay: To ask the Secretary of State for Defence how many press and communication posts in his Department are remunerated at (a) between £50,000 and £99,999 and (b) £100,000 or over. [30400]

Mr Robathan [holding answer 13 December 2010]: Our records indicate that in March 2010, 52 press and communication posts across Defence were remunerated at between £50,000 and £99,999. These posts are across the military and civilian defence community, in the UK and overseas in Headquarters and in the single Service units.

A further 109 posts were filled by military ranks or civilian grades for which the salary range straddled £50,000. The range of salaries that these posts could have been paid is between £45,190 and £56,078. It is not possible to say how many of these individuals were paid more than £50,000.

20 Dec 2010 : Column 987W

There was one press and communications post remunerated at £100,000 or over, which is a military two-star appointment.

We are taking a number of steps to reduce expenditure on defence media and communications. This will include further post reductions.

January 2011

Supplementary written evidence from the Ministry of Defence

Question 136 - Note on the carrier procurement

The contract to build two Queen Elizabeth Class (QEC) aircraft carriers was signed in July 2008 and is being delivered by an Aircraft Carrier Alliance (ACA) consisting of MOD, BAE Systems, Thales and Babcock Marine.

The baseline cost for building two carriers, pre-SDSR, was reported in MPR10 as £5,900M, excluding Assessment Phase costs and including cost of capital. Removing cost of capital and adding back Assessment Phase costs gives the MPR10 Capital DEL baseline cost of £5,254M. The agreed Final Target Cost (FTC) position (post MPR10) is slightly lower at £5,241M. Agreement of FTC is a key point in the QEC contract as it sets the parameters against which the ACA's final cost performance will be measured. These figures exclude any costs arising from SDSR decisions on the Carrier programme.

The cost for building the first carrier only (HMS QUEEN ELIZABETH) was assessed during SDSR as £4,275M, which was £979M lower than the equivalent MPR10 baseline for building two carriers (this equates to the roughly £1Bn saving explained at the Hearing). This was based on assessments made by MOD cost engineers and an external consultancy team working independently of the MOD project team. The savings represent cancellation of approximately £1.3Bn worth of programmed expenditure for the second Carrier (HMS PRINCE OF WALES), together with receipts from the sale of surplus equipment, offset by some cost increases due to, for example, loss of economies of scale on HMS QUEEN ELIZABETH and additional VAT payments that become payable on expenditure to date for the cancelled Carrier (VAT exemption only applies to completed ships).

If we had decided to cancel both the Carriers and immediately cease all build activity, the costs were assessed during SDSR to be in the region of £3,156M, or £2,098M lower than the equivalent MPR10 baseline (this equates to the roughly £2Bn saving explained at the Hearing). This is based on internal MOD estimates. The savings represent cancellation of approximately £2.8Bn worth of programmed expenditure for both Carriers, together with receipts from the sale of surplus equipment, which is then offset again by VAT payments that become payable on project expenditure to date.

In terms of the carrier contract itself, therefore, cancellation of either one or both carriers would have saved broadly £1Bn or 2Bn in total respectively.

However, as the cancellation costs would have had immediate effect, the costs in the short term would have been significantly higher than proceeding with both carriers as planned; nearly £1Bn more in Financial Year 11/12 if both carriers had been cancelled.

In making its SDSR decisions on the carriers the MOD also had to take into consideration the wider impact on the UK warship industry. Put simply, if one or both of the carriers were cancelled, and if the Government wished to retain a UK capability for the design and manufacture of complex warships, then alternative replacement work would need to be found. Or, the Government would be faced with the costs of industrial rationalisation. These rationalisation and redundancy liabilities pre-dated the carrier contract (and the later Terms of Business Agreement) and arise from the mandated Treasury Yellow Book costing rules.

Although often linked, it is important to stress that the decision to build carriers has always been separate to the decision to sustain a longer term UK warship building industry that was the rationale behind the agreement to the TOBA.

BAE Systems Surface Ships (BAES SS) Terms of Business Agreement (TOBA)

The TOBA, signed in July 2009, provides MOD guarantees to BAE Systems of a minimum level of ship build and support activity of around £230M/year. This level of work was independently verified as the minimum level of work possible to sustain a credible warship building industry in the UK. The TOBA has been designed to incentivise major reductions in the size of the industrial base on a managed basis to minimise the rationalisation cost for which MOD was already liable under historical Yellow Book rules.

The TOBA can be cancelled at anytime. Cancellation crystallises the extant rationalisation costs, leaving MOD liable for remaining industry closure costs and compensation to BAE Systems for their lost investment. During the SDSR, cancellation of the TOBA would have been expected to cost in the order of £630M. A key element of the TOBA is that it ensures that this figure reduces year on year against an agreed formula and bounds MOD's liabilities.

Related programmes

The financial impact on other related programmes such as the Joint Strike Fighter (JSF), and Type 26 Global Combat Ship (GCS) has also been excluded here, but was taken into account in the decisions taken during SDSR.

Question 141 - Senior Responsible Officers

The Department has already stated, in response to a Parliamentary Question, that determining whether there had been a gap in succession of Senior Responsible Officer (or equivalent) for all thirty projects in the MPR, some of which were initiated many years ago, would incur disproportionate cost. We will provide this information in response to the Committee's request, but it will take some time to do so, and we aim to provide it by the end of January 2011.

Question 146 - Departmental Press Officers

The answer to the Parliamentary Question on press officers, which was answered shortly after the hearing, was as follows:

20 Dec 2010 : Column 986W

Departmental Information Officers

Stephen Barclay: To ask the Secretary of State for Defence how many press and communication posts in his Department are remunerated at (a) between £50,000 and £99,999 and (b) £100,000 or over. [30400]

Mr Robathan [holding answer 13 December 2010]: Our records indicate that in March 2010, 52 press and communication posts across Defence were remunerated at between £50,000 and £99,999. These posts are across the military and civilian defence community, in the UK and overseas in Headquarters and in the single Service units.

A further 109 posts were filled by military ranks or civilian grades for which the salary range straddled £50,000. The range of salaries that these posts could have been paid is between £45,190 and £56,078. It is not possible to say how many of these individuals were paid more than £50,000.

20 Dec 2010 : Column 987W

There was one press and communications post remunerated at £100,000 or over, which is a military two-star appointment.

We are taking a number of steps to reduce expenditure on defence media and communications. This will include further post reductions.

January 2011



 
previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2011
Prepared 22 February 2011