Examination of Witnesses (Questions 100
THURSDAY 25 APRIL 2002
100. The WSMI appears to allow greater competition
of surface ship refits, at least in the short term. How have you
structured the deals with the dockyard contractors to ensure competition
survives in the longer term?
(Mr Coles) The contracts are actually on an output
spec basis, the companies are delivering an output and the contract
is incentivised both on how they deliver that through a number
of key performance indicators and profit sharing arrangements,
so that is how it is incentivised. In other words, it has looked
at what the output is, how to deliver the output, if you do not
meet the output you stop getting paid, if you really do it badly
you actually lose your profit and finally, of course, if they
really, really do not perform, we can take the whole thing back
in-house or sub-contract it to another management company.
101. With contractorisation of the dockyards
in 1987, and then their outright sale in 1997, the MoD was able
to keep some pressure on refit costs through the competitive element
of the programme and in extremis your ability to switch
refits between dockyards if you were not satisfied with the prices
available. With naval base support now to be contractorised, what
leverage will you have if prices or performance at one of the
bases becomes a problem?
(Mr Coles) Two things. The refit remains exactly the
same but we have included, also, in the competitive programme
what we have called docking periods which occur, period refits.
They will be open to competition, they are not allocated. Finally,
of course, the periods inside, when a ship is in fleet time, as
we call it, that is delivered by the output spec by the company
and they get paid their premium or their costs on the basis of
how they deliver the output not what the input is. So this is
a fundamental change, it is not input based, it is output based
so it is quite a significant change in the way we do business.
102. As part of the WSMI, the MoD is renegotiating
its contractual obligations for allocating refits to the dockyards
without competition. Why was this necessary, given that your allocated
programme obligations would have gradually declined steadily over
the years ahead anyway?
(Mr Coles) I think as Sir Robert has mentioned earlier,
the competition is the stimulus for innovation and change, whether
it is in techniques or management activities. There is a process
which drives costs out and inefficiencies. If we can bring that
further forward, that must be an advantage to us and the taxpayer
and the Royal Navy of course. It is a part of the process of bringing
the benefits of competition earlier in the programme and we can
do that through this arrangement.
103. Under the new arrangement which has been
negotiated with the three dockyard contractors when will allocated
refit work come to an end at each of the dockyards? What will
be the ramifications for job continuity which has been raised
in the media in the last week or so? How does that compare with
your current obligations?
(Mr Coles) At Devonport I think it stops almost immediately
because they have a very small allocated programme anyway. At
FSL it terminates quite quickly, there is a small amount of work.
At Rosyth it is brought forward by two years so instead of 2007-08
it is 2004-05.
104. Any information on job continuity?
(Mr Coles) The jobs that we announced earlier about
the likely reductions, the fall-out of the figures I have already
given as part of the partner arrangements.
105. Can I ask a question in terms of the amount
of refit work that there is. First of all, can you give us an
indication of how it has risen and fallen over the last ten years
and what your projections are for the future of the level of refit
work which will be needed? In doing that, can you say in terms
of the fall how much does that relate to the reduction in the
size of the fleet? In terms of the capacity in the refit, what
is the current position on surface capacity?
(Mr Coles) In big handfuls, from about 1987 to about
now, I guess the total industrial capacity has about halved, in
terms of the amount of activity we need for a variety of reasons:
people are more efficient, we are better at doing it, ships are
newer, better techniques, better available to the ships. In terms
of the number of ships that actually pass through in any one year
for the maintenance cycle of these refits, it has gone down from
about 105 to about 50. So the number of ships has halved but also
the amount of capacity that we need has dropped, it is 105 ships
to 51, 500,000 man-weeks to 250 or thereabouts. There has been
a change in the number of ships but also what we do on them and
how we do it with a consequent reduction, of course, in the amount
of effort we need in the companies themselves, and sometimes they
do indeed sub-contract that out as well so it is not the whole
106. In terms of the future, how many dockyards
do we need to meet the requirement?
(Mr Coles) The number of dockyards that we will need
or refitting yards in the end will be determined by the companies
staying in the market or bringing in other work to do that.
107. Come on.
(Mr Coles) That has to be the answer because they
are private companies.
108. Come on. No. We had this yesterday with
some civil servants trying not to answer the question. What is
your estimate? Putting to one side the private work, what is the
estimate of the number of dockyards needed for work you project
is coming from the MoD?
(Mr Coles) I do repeat again it is not a question
I can answer specifically because we could do it all in one if
we wanted to or we could do it in five. At the moment we have
three and as long as they are competitive they will remain competitive
with the work we have and they might be able to supplement their
activity, as they are doing at the moment, by additional work
they are bringing in to keep the overhead down or generate income.
They do that very successfully so in the end it must be their
responsibility to say "Well, I will stay in the business
and meet our work under the competitive pressures".
109. Let me ask the question a different way
and see if I can get a reply. In terms of shipyards obviously
we want a situation where we want competition between different
(Mr Coles) Yes.
110. Are you saying that we need three dockyards
to remain competitive?
(Mr Coles) I would say we need at least two.
111. I think I have got the answer. Thank you.
Can I ask another question then in terms of decisions taken in
terms of procurement. What decisions are taken in terms of when
you are buying or procuring a ship? What is the trade off between
the procurement and the upfront costs of that and then the long
term case for selecting a contractor for logistic support arrangements?
What is the balancing act?
(Mr Coles) I think as Sir Robert indicated, maybe
he should take the lead on this question, we look at procurement
and support as a holistic activity, in other words, looking not
just for the cheapest upfront costs but the cheapest through life
cost as well. Decisions taken in what I would call the upfront
part of procurement, and what happens consequently, are taken
in the round and, of course, the responsibility passes for warships
from Sir Robert's DPA to myself at some point in the cycle. So
it is taken in the round right at the very start, we look at what
is happening on the 45 or the others right at the heart of this,
how we are going to procure these and how we are going to support
(Sir Robert Walmsley) I think that is an absolutely
crucial issue for us. Everybody knows that we have been saying
that we want to take through life costs into account for as long
as I have worked in ship procurement or ship support. I do not
think we have done it enough. There are two techniques which I
think I would just add to what John Coles has outlined. The first
is that you can never know the costs that are going to be generated
a long time in the future anywhere near as certainly as you can
know the costs that you are going to incur next year, that is
just life, because circumstances will change etc., etc..
112. You can do things at reduced costs later.
(Sir Robert Walmsley) We can certainly. The basic
concept that the estimated costs of the year 2015 are known with
less certainty than the estimated costs for the year 2005 just
remains to me a common sense proposition. I am quite keen, therefore,
on the idea that we make these judgments about the comparisons
between alternatives on, this horribly sort of jargon phrase,
net present value which means that we discount at six per cent
per annum the financial significance in decisions. So something
in the year 2015 will have had six per cent knocked off it for
up to 13 years. That stops you from doing silly things because
people have made ridiculous estimates of what is going on in 2020
not because necessarily they have got them wrong but because you
are going to do different things in that year, that is the first
point. The second point is that it is all very well except that
it is still Mr Coles' organisationthe Warship Support Agencywhich
is bearing the costs of this support activity rather on the basis
of having trusted the estimates made by my team in which, of course,
his experts participate before we made the initial acquisition.
I think there is an issue here about making the initial provider
of the ship in some way link in to bearing the costs of support
downstream. We have been very, very careful to do that with the
Astute nuclear submarine contract which I think is probably the
first serious warship contract we have done that with.
113. Does that not have implications for dockyards
if you do that? Some of those procurers could follow up that work
(Sir Robert Walmsley) They could if they were really
stupid but they are not really stupid because they know where
the ship is going to be based so when Astute submarines turn up
at Faslane they will use the providers, that Mr Coles has been
talking about, of the services in Faslane to do the work. The
question is how much work will be required and that work will
be commissioned by the submarine prime contractor from the incumbent
organisation at the naval base in Scotland. The question is who
is paying the ultimate bill, and the answer is the submarine designer
is linked in to that, he is going to design a submarine which
requires less maintenance rather than thinking "Oh, good,
I can make a second wodge of money on this by generating a huge
maintenance -heavy ship". We are trying, in other words,
to tie in maintenance costs to the initial acquisition costs by
thinking about it, including this discounting process I mentioned,
as well as contractually because in a way it is contracts that
cut the real mustard not promises.
114. If you are going down that route, has any
thought been givenI am not suggesting you procure warships
in the same way as ro-ro ferriesor is there any thinking
being given to tying up onboard maintenance costs to the warship?
(Sir Robert Walmsley) No. I think I told this Committee
last yearbecause I looked up what I saidthere is
no question of a private finance initiative for warships. I have
made lots of mistakes in my time as Chief of Defence Procurement.
When I was pushing it on survey ships to have private finance,
eventually I got punched on the nose by the navy board and told
to go away and buy the ships properly, and I did that. I am not
going to make the same mistake again.
115. That is why you are so enduring, Sir Robert,
you happily admit mistakes.
(Sir Robert Walmsley) That was a king-size mistake.
Chairman: We know you have a lot to admit
to but the fact you do it is quite refreshing.
116. Are there any ideas, for example, of having
a maintenance contract with the actual provider further downstream?
(Sir Robert Walmsley) I think all these ideas need
to be considered. John Coles has just been reminding me that of
course the new offshore patrol vessel contract is very much done
on this basis of tying in to the provider so that he maintains
the ship so if they cost a lot to maintain then he will pay the
burden. I think that is the right route. As to who should do the
eventual maintenanceand I recognise the sensitivity of
thisthe navy wants the ships to spend their time in harbour
in naval bases. We too, we have talked a lot about people this
morning, and I know it is not fashionable necessarily for civil
servants to talk about service people but let us be absolutely
clear that getting the right people to man the ships is totally
critical to the defence capability and a key issue for the Royal
Navy. If we think that we are going to encourage people to serve
in ships if they are sent off somewhere different from their home
port for most of their maintenance then that to me is the road
to ruin and we have to be very, very careful before we do it.
It should not be excluded as a possibility otherwise the chaps
will just hold us to ransom. My guess is it will continue to be
done at the home port, most of it.
117. Even if a supplier can say that they are
going to generate significant savings, you would balance that?
(Sir Robert Walmsley) How would they do that? They
would be making it up and we would want to say "How are you
going to do that?" If they know how to do it then we would
tell the people at the home port to do it that way too. The key
thing is to generate ships which do not require lots of maintenance.
I think it is very important that the designer and the initial
builder are hooked into that proposition.
118. Kevan Jones just touched on savings and
I would like to stay on it for a while. With rationalisation of
naval base and dockyard activities under the new commercial arrangements
we are speaking about today, just for the record by how much do
you anticipate that spare capacity can be reduced?
(Mr Coles) I do not think the spare capacity will
be reduced over time with the counter proposals because the spare
capacity in a sense, particularly with a naval base, is essentially
the number of people working in it because, of course, if the
assets are not working properly then the naval base commander
or the partner will actually remove them. It is mainly about the
asset utilisation and or the people who are there.
119. I do not understand that.
(Mr Coles) What I am saying is we are not generating
spare capacity, we are trying to make sure it is not there. There
are two things. One is the number of people, we have already talked
about the final number of people. In terms of the assets that
are in the dockyard companies or in the naval bases, they will
be looking to ensure the assets if they are duplicated can be
shared and if they do not need them they will be disposed of.