Examination of Witnesses (Questions 287
WEDNESDAY 8 MAY 2002
WALMSLEY KCB, AIR
KCB, AFC AND MR
287. Welcome, gentlemen. Sir Jock, twice in
a fortnight may be too much for you! This is a most glittering
array of talent that we have seen in this Committee for some time
and rivals tonight's match with Manchester United. We have high-profiled,
high-salaried stars and well-known suspects sitting behind you
and to your right. You may not all wish to answer all the questions,
but as you represent different elements of the procurement process,
it may be apt to hear more than one person speak on a question.
Perhaps I shall address questions to you, Lord Bach, and then
you can work out who wants to hide under the table and who wishes
to be forthcoming. We have people who are pretty forthcoming.
I propose to continue until at least a quarter to one. Lord Bach,
welcome to your first and hopefully not your last meeting with
the Defence Committee. Would you like to say anything by way of
(Lord Bach) I am looking forward to the next two and
a quarter hoursor will it be six hours! I am slightly apprehensive.
It is rather like going to a fair and taking a ride that one has
not been on before. One has a sense of anticipation and is interested
to see what the ride is actually like.
288. As at Alton Towers, I suspect that you
are well strapped in.
(Lord Bach) Thank you for that warning. I do not think
that I need to introduce any of those with me today. I look forward
to doing my best to answer your questions.
289. We shall start with some questions on private
finance initiatives. When we requested information from the MoD
we requested information on five programmes that would fall within
the framework of PFIs. I want to explore a couple of those. Your
heavy equipment transporter programme is the first and, so far,
the only PFI that uses sponsored reserves, although you have others
in the pipeline that are likely to use them. What have you learnt
from this "pathfinder" programme about the use of sponsored
reserves? Have your experiences shaped the way in which you are
implementing the other PFIs?
(Lord Bach) As far as PFI is concerned, at the Ministry
of Defence we look at it in a pragmatic way on all occasions.
Whenever it delivers us better value for money than a conventional
procurement, we shall take that option. As you know, Chairman,
we have taken it already in 42 projects, bringing some £2
billion of private sector investment into defence. We are looking
at it over another 40 projects that would bring in much more in
the way of private sector investmentup to £12 billion.
Your question is about sponsored reserves. In regard to sponsored
reserves, it is early days. As you know sponsored reserves will
undertake substantially the same tasks for the MoD in peacetime
under service contract arrangements as they do in operations.
When the department requires those tasks to be performed on operations,
sponsored reserves like other reserve forces, are, of course,
subject to military law and discipline and wear the uniform of
the service in which they serve. In that respect they are materially
different from contractor staff who work in support of operations.
We have no single blueprint of training that sponsored reserves
must have. It will depend upon the particular role that they play.
At the minimum they are likely to receive training on military
organisation, conduct, ethos, discipline and perhaps basic small
arms training for self-defence. The point of using sponsored reserves
is to enable them to continue to do the same job that they do
in peacetime and if that is right we do not think that a large
amount of additional military training will be necessary. I want
to make it clear to the Committee that we are feeling our way
on this. On the HET (heavy equipment transport) PFI project, for
which a contract was placed in December last year, the service
does not commence until July 2003 with full service achieved,
we hope, in July 2004. Either I or my successor, or my successor's
successor will be in a better position to tell the Committee how
sponsored reserves have worked at a future meeting of this Committee.
290. How are you able to go completely over
to contractor staff operating the Ro-Ro ships and heavy equipment
transporters, when you still need RAF crews to fly the strategic
(Lord Bach) As far as the tanker aircraft is concerned,
it is a project that is quite a long way back, particularly from
the last one you asked me about, the HET. To begin with we shall
have a mixed manpower of which at least 75 per cent will be RAF
crews and 25 per cent may be sponsored reserves. That will be
ground crew and pilots as well. We think that that is a sensible
strategy to begin with, to see how it works. One of the crucial
things that we are trying to do is to remain flexible in the way
in which we introduce the concept of sponsored reserves and the
way in which we run each of our PFI projects. That will mean doing
different things in different cases. We think that it is appropriate,
certainly so far as FSTAs are concerned, and our initial thinking
isI repeat that it is important to remember that no final
decisions have been taken about FSTA yetthat a combination
of service and sponsored reserves is the best way to go.
291. On the strategic tanker programme, your
helpful memorandum notes that an "air transport" element
will be included in the programme if it looks to be cheaper than
current civil aircraft chartering arrangements. How will third-party
income be generated by the contractor if this PFI is confined
to a fuel-carrying role?
(Lord Bach) I shall ask Sir Robert to answer that
(Sir Robert Walmsley) I do not think that there is
any question that third-party revenue would be confined to a fuel
tanking role. The aircraft are, of course, intrinsically capable
of carrying freight because they are tankers. There is a large
volume inside, the internal volume of the aircraft, that is not
full of fuel. We hope that the competing private contracting consortia
would seek to enter into arrangements to carry freight or passengers.
It does not take long to put the seats back on one of those aircraft
and to use it for passenger transport. That is the essence of
the competition of course. If they are willing to take that risk,
they will produce a better value-for-money solution for us.
292. On the balance of contractor staff and
sponsored reserves as opposed to pilots, can you be clearer? I
accept that you need flexibility as you bring forward the projects
in deciding that balance, but what are the criteria when you do
decide? In strategic tanker aircraft the indication is that there
will be more RAF than contractor staff, whereas for the others
it is more contractor staff than RAF. How is that balancing decision
(Lord Bach) On a case by case basis. Mr Knight, you
are right in the sense that there would be more service than contractor
staff to begin with, but that is to begin with. We do not know
whether that balance would stay the same as FSTA came on line
and we had a few years' experience of it. In the case of Ro-Ros
and HET, the designation of sponsored reserves does not mean that
we see people being put into dangerous situations. The services
being provided are not intrinsically military in their nature
and can be met by the private sector. As far as FSTA is concerned,
we feel that at least to begin with it is important, as a matter
of reassurance as well, to the outside world that there is a fairly
large quantity of service people.
293. The principal factor in the judgment that
you take is the extent to which they would be involved in combat
or close to combat?
(Lord Bach) That is one of the major factors. As you
know, the closer we get to operational necessity, the less inclined
we are to use PFI.
294. What about when you get a bit closer to
(Lord Bach) It is a matter of judgment. We felt with,
for example, the combat vehicle project that, for a number of
reasons, it was best to procure by conventional methods and that
was clearly close to the frontline. Our present thinking on FSTA
is that it is the other side of that. As I have tried to make
clear in my answers already, we have made no final decision on
that. We think we have the situation about right so far.
295. On what do you base those judgments? You
say that it is a closely-called decision. What tips you down one
side or the other? The closeness to the frontline cannot be the
(Lord Bach) No, it certainly is not, but it is certainly
one of the factors. All the time we are seeking to demonstrate
value for money. That is the broad concept. I think I have already
said that. By way of example, as far as the Combat Support Vehicle
is concerned, we thought that there was limited scope for third-party
revenue, which is also an important feature for two reasons. Firstly,
there is the dispersal of those particular vehicles when they
are on operations, which means that it can be hard for a contractor
to use them for third-party purposes. They are specialist vehicles.
So we take on board a number of considerations on each occasion;
for example, if there is a limited scope for innovation, as there
often is if one is very close to the operation. There may be limited
scope for sponsored reserves if you are very close to the operation.
Those are factors that we also take into consideration when deciding.
Maybe Sir Jock Stirrup can take the matter further.
Chairman: We shall come on to that later.
296. I suppose I should declare an interest.
I want to ask questions about Skynet 5 and, of course, Astrium
in Portsmouth and in Stevenage has enhanced its profile somewhat
having been selected for it. On Skynet 5, PFI will supplement
and eventually replace the existing ageing Skynet 4 system. It
will rely on only two satellites, as opposed to three before,
and some spare capacity will be going to the commercial sector
for communications. Although you are insured under Skynet 5 with
the two satellites, under the previous system there were three,
which assumes that two were necessary and one was a back-up. What
does the Skynet 5 programme offer you that you would not get from
a straightforward commercial contract for satellite capacity as
and when you need it?
(Lord Bach) I shall ask Sir Robert to deal with the
numbers. First, we are very pleased indeed with the way in which
the Skynet 5 competition has been carried out in what has resulted.
We believe that Skynet 5 will provide satellite communications
to our Armed Forces in much the most efficient and cost-effective
way. I remind the Committee that the total throughput of Skynet
5 is about two-and-a-half times greater than the present Skynet
4 system. One of the great advantages of the private finance initiative
here is that we shall deal with the usage made of Skynet 5 by
the contractor for our purposes, rather than having to pay for
the full programme irrespective of future actual use. On the issue
of why we need only two rather than the three satellites that
are presently required for Skynet 4, I shall turn to Sir Robert.
(Sir Robert Walmsley) It is simply a matter of geographical
coverage. We have always just needed two. Against the possibility
that one was lost on launchthe single most likely cause
of total lossor did not deploy or work properly when placed
in orbit, we thought that it was sensible to construct three satellites.
Having constructed three, it made sense to launch three rather
than just leave it in a cupboard on the ground, wasting away.
We looked carefully at the possibility of insuring ourselves against
loss on launch as we did in the days when we did it as a conventional
procurement for Skynet 4. The difficulty was that it is all very
well someone giving you back all the money when the satellite
has blown up, but that does not actually replace the communications
capacity that you need. With a relatively short-lived satellite
system as Skynet 4, with a design life of something like six years,
you would have to launch the second of the three Skynet 4 satellites
very early in order to ensure time to build the third one with
the insurance money and launch it to take over the services if
the second one blew up. I know that sounds unbelievably complicated,
but that is the way it is. With Skynet 5 the satellite life is
closer to 15 years. The arrangement isa big risk for the
private finance providerthat he builds the two and takes
out an insurance policy as to whether they both successfully achieve
orbital performance. He launches the second satellite soon enough
to give himself time to assemble all the bitshe will probably
have quite a few of themso that he can launch that to take
over from Skynet 4 stage two satellites in good time to ensure
a seamless provision of operational capability. That is how it
works. That does, of course, save quite a bit of money. It is
important to emphasise that the calculations that we have done
show a robust 6 per cent saving on this private finance solution
as compared with the conventional procurement because of the third-party
capacity use. There are plenty of military customers out there
who want to buy it. They can all afford the terminals that will
fit in a suitcase or a trunk, but they cannot afford the satellites,
although they would like a piece of one. The consortium is ready
to sell that to them.
297. So the commercial risk is being covered
by the company that is going to be the back up. The severe cost
if they lost a satellite will enable them to be prepared to replace
it immediately, rather than suffer massive costs?
(Sir Robert Walmsley) Exactly. I return to the point
that we are not just interested in the money. We have to have
a robust mechanism to provide the communications. There is no
satisfaction in having the money in the bank, but not having the
satellite. We need the communications and we are quite satisfied
that this arrangement will provide a seamless transfer from Skynet
4 to Skynet 5.
298. At times of busy demand for capacity, there
needs to be extra drawn from commercial satellite services. When
operations are in the headlines, we have seen how capacity is
often quickly snapped up by television firms grasping at the headlines.
How is Paradigm going to be able to guarantee that your satellite
traffic demands will always be met?
(Sir Robert Walmsley) Their contract provides for
retaining clausesif that is not too simplistic an explanation
of something that is undoubtedly extremely complicated - to have
access to commercial capacity.
299. It is in the contract?
(Sir Robert Walmsley) We have not signed the contract
yet, but it will be in when we have signed it. This is a really
robust arrangement. The United States is quite happy to rely on
commercial satellite support for military operations. We should
be too. We should not just confine ourselves to military satellites
for all our traffic.