Examination of Witnesses (Questions 20-39)|
WALMSLEY KCB AND
MONDAY 10 DECEMBER 2001
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 thiseven on extraordinarily
advanced workon 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 projectsand this of course
is what you want to be able to demonstrateshow 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
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
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.
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 senseand I do not mean
this as a trivial riposteI 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 attentionthis is marking our own homework,
getting out of that difficultyto 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
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.
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