UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 113-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

CARRIER STRIKE

MONDAY 20 MAY 2013

JON THOMPSON, BERNARD GRAY and AIR MARSHAL STEPHEN HILLIER

Evidence heard in Public

Questions 1 - 113

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Public Accounts Committee

on Monday 20 May 2013

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Stephen Barclay

Guto Bebb

Chris Heaton-Harris

Meg Hillier

Fiona Mactaggart

Austin Mitchell

Ian Swales

Justin Tomlinson

Amyas Morse, Comptroller and Auditor General, National Audit Office, Gabrielle Cohen, Assistant Auditor General, NAO, Tim Banfield, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury, were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Carrier Strike: The 2012 reversion decision (HC 63)

Examination of Witnesses

Witnesses: Jon Thompson, Permanent Secretary, Ministry of Defence, Bernard Gray, Chief of Defence Matériel, MOD, and Air Marshal Stephen Hillier, Deputy Chief of the Defence Staff (Military Capability), MOD, gave evidence.

Chair: Welcome. I think that you have got the quality here today-

Jon Thompson: Obviously.

Q1 Chair: So I hope we can deal with this. This is a pretty sorry saga, really. Mr Thompson, the questions probably come to you. We are looking at this very narrow thing: the 2010 decision. How did you get it so wrong?

Jon Thompson: The three of us were not personally involved in that decision, but we will try to give the best explanation-

Q2 Chair: You were director of finance.

Jon Thompson: Yes, but if you will recall, there was a National Audit Office Report at the time that said that, as a director general of finance, I was not involved in any budgetary matters. There was a hearing in October 2010. Mr Morse is nodding. [Interruption.] Thank you. To the best of our knowledge, and our explanation would be-

Q3 Mr Bacon: I remember that one of our conclusions was that perhaps you should have been involved.

Jon Thompson: Indeed. I would obviously support Mr Bacon’s conclusion, and that was your recommendation.

Mr Bacon: What was the name of the permanent secretary? I cannot remember. Was it Bill?

Chair: No, it was after that. It was Ursula.

Jon Thompson: The decision was based on-

Chair: 2010?

Jon Thompson: Yes, it was Sir Bill. The decision was based on the best information that officials had at that time, but that information was deeply flawed-

Q4 Chair: Okay, you are justifying it. Were you around then, Mr Hillier-

Jon Thompson: No, I am not justifying it, actually. It was deeply flawed and immature.

Q5 Austin Mitchell: Was that Report primarily to do with financial issues-you wanted to save money?

Jon Thompson: No, it wasn’t. It was that a decision to switch to the carrier variant was made at some considerable speed. It was set out in the 2011 Report and, as that Report says, at the time the decision was made, we didn’t have information about, for example, how well cats and traps would work.

Q6 Chair: In this Committee we are often in the position, particularly with defence procurement because it takes so long, that we do not have the right people. You were not around either, Air Marshal?

Air Marshal Hillier: No, I was not.

Q7 Chair: What is pretty shocking is that David Cameron is sent in to bat, and no doubt he was a decision maker, but if you look back at his statement, he says that the previous decision taken in 2006 or 2005, which you are now reverting to, was for a more expensive and less capable version of the strike fighter. That was his assertion, and he said that the carrier version of the strike fighter was less expensive, has a larger range and carries more weapons. That is what he told Parliament. It concerns me. And, presumably, MOD helped to write his statement.

Jon Thompson: Yes. The Prime Minister’s statement was clearly based on the advice that MOD officials would have put into the national security secretariat, which advise the National Security Council. Part of his statement was based on an assumption that cats and traps, for example, would cost £800 million, which is clearly wrong, as this Report sets out.

Q8 Chair: Well, we come to figure 3 in the Report, which I think is really shocking. It is an attempt to try to explain how you got it so wrong. I had assumed it was the technology-when we looked at it last time, we said you have no idea what the technological challenges are going to be, and you have no idea what is going to work. When I then looked at figure 3, which is the explanation of why the costs had increased massively, I sat there thinking, "Why the hell didn’t they realise this? Why didn’t they recognise it?" This is not technology going wrong: this is understanding that you have to have a bit of discussion with the Americans-item one-and technical assistance from them. It is the VAT issue, which is so basic that I can’t understand how that was missed out. You hadn’t talked to BAE, or taken into account the full cost of UK industry. There are all of these items listed here. There is inflation-not to have thought about inflation. There is testing and commissioning-not to have thought about testing and commissioning. This is not a case of unknowns going wrong: these are "knowns" that went wrong. That seems to me to be pretty awful.

Jon Thompson: Perhaps Mr Gray would be better at explaining the difference between them.

Bernard Gray: I agree with you. The issue is how it came to happen-it clearly happened. The decision to make the switch to CV happened late in the process of the defence review; when we looked back at the documents that were around through that period, it was not in active discussion until the very end of the defence review, and therefore people were being required to generate numbers very, very quickly. Clearly, my organisation was asked how much cats and traps would cost, for example. My answer to that question-and admittedly I have the benefit of hindsight-would have been, "I can’t tell you right now, because I have to go and do a proper piece of work in order to determine what the answer to that question is." But people feeling under pressure, wanting to give advice to Ministers and so on, rushed at answering the question, and they did not take into account issues such as inflation, which they should have done. Also, the way you choose to procure the equipment-either directly from the manufacturer or from the foreign military sales system-makes a difference to whether or not VAT is chargeable. When we subsequently got into conversations with the Americans, they said "We want you to purchase it through the FMS system," and therefore VAT was chargeable when they previously made the assumption that it hadn’t been. That is how that particular-

Q9 Chair: Presumably, in 2006, when they were going for the other variant, they would have talked to the Americans and there would have been a decision on VAT in relation to that.

Bernard Gray: No. This is not about the aircraft-this was the purchase of the catapult system. The point is that the central underlying problem with the 2010 decision is the speed with which it was taken and the secrecy with which it was taken, which did not allow either time or access to go and speak to other people. That is at the root of the problem.

Q10 Chair: But the 2012 decision was also taken very quickly-the NAO says on better information, and I accept that-but it was taken very quickly and pretty secretly. You set up another mechanism of, I accept, 15 people-however many-nevertheless, the fear, sitting here and having a déjà vu attitude to it, is what was different. It was taken-and we will develop the argument, I am sure, during the course of the hearing-but there are still so many unknowns on cost, and you are coming to the much tougher period, both on the carrier itself and on the costs and viability of the planes. What was different in 2012? Or will we be sitting here next year, saying that we are in the same boat yet again?

Jon Thompson: What was different in 2012 from 2010 was that both the National Audit Office and your Committee had agreed that until we had reached the end of the so-called conversion and development phase, which was an 18-month programme to understand whether you could implement the policy or not, you did not have a mature date. That was the conclusion of the previous Report and your previous hearing. We got a significant way through that, and, as soon as we had what we thought were significantly improved data, we went back to Ministers and said, "Do you wish to carry on with this policy, or do you want to revisit the decision?"

So we did have a significantly better understanding of, for example, EMALS, the technical risks and so on, which are set out in the Report. I think you are right to ask whether that information is completely mature, and the answer to that question is still no. We colour-coded whether we thought the information was mature, and indeed the Report colour-codes the maturity of that information. We were trying to say to Ministers, "We still do not have perfect information to make a decision, but, as the NAO also concludes, we think there is a significant difference between the policy options." Almost irrespective of how this moves, we thought that a reversion to STOVL is still cheaper and with a lower technical risk. You may want to debate that, but it is the conclusion of the NAO’s Report, and it was our conclusion, too. We were trying to be much more transparent with Ministers about the decision-making process and about the maturity of the data on which they were making their decision.

Q11 Chair: One of the arguments in 2010-I am turning to Air Marshal Hillier on this-is that you wanted interoperability with the French and the Americans. That was one of the assertions in the statements to Parliament. There are two questions. First, it seems that it was never there anyway, so you were asserting something that was undeliverable. Secondly, it suddenly became a non-priority-it was a priority when you were doing the defence review, but it is a non-priority 18 months later. So it was a priority, and you said that you were going to deliver it, but it is unclear that you ever could have done so, and 18 months later it suddenly becomes irrelevant.

Air Marshal Hillier: Interoperability with the French and the Americans remains a priority, but when we were talking about interoperability in 2010, I think the focus was particularly on whether we would be able to do what is called "cross-decking"-whether we would be able to land our aircraft on another nation’s aircraft carriers. That was proven to be more technically difficult than we thought, but, actually, the key for me is that it is not at the heart of interoperability.

Q12 Chair: But it was one of the justifications in 2010. I haven’t got the quotation, but one of the justifications in all the statements put out at that time to justify the 2010 decision was the idea that we could all share each other’s carriers.

Air Marshal Hillier: As part of the decision that we are talking about today, we discussed with the French and the Americans what exactly "interoperability" means in much more detail. The emphasis was much more on whether the UK can deliver a Carrier Strike capability that will allow us to do proper burden sharing between nations and to be able to operate more at the operational level-in other words, to work alongside each other. That was judged far more important than just the ability to land aircraft on each other’s carriers.

Q13 Chair: So you changed the definition of "interoperability" to suit what you could actually deliver?

Air Marshal Hillier: No, I think we refined the definition because we were much more able to discuss it with our allies. The other key part of interoperability is that, if we had stayed with the CV variant, the earliest point we would have been able to do cross-decking would have been at least 2023. By reverting to the STOVL version, we are able to interoperate and be alongside our allies in 2020. That is a huge interoperability benefit, which is reflected by both the US and the French in our discussions with them.

Q14 Chair: I appreciate how difficult these decisions are, but the last time you were in front of us it didn’t really matter that we didn’t have an aircraft capability for eight years-I cannot remember the exact figure, but eight years is what comes to mind.

Air Marshal Hillier: Yes.

Chair: Suddenly, three years becomes absolutely crucial to decision making. That does not sound very credible.

Air Marshal Hillier: We made the judgment in 2010 that that gap was acceptable, but what we discovered as a result of the work we did on the CV variant is that the gap was extending all the time and that there were still significant costs and technical and time risks.

Q15 Chair: Why was eight years acceptable in 2010, and why, then, did 11 years become unacceptable in 2012? I don’t understand. What changed? Again, I am not directing this at you personally, but shouldn’t the Air Force have already had that argument before 2010?

Air Marshal Hillier: The argument was had in 2010 and the capability gap was accepted then. As part of the work that we went through in 2012, the Chief of the Defence Staff, looking at the world as we saw it in 2012, judged that extending that gap by a further three years was not a good idea.

Q16 Chair: Why? What changed his mind? What is so critical about three years? I know nothing about defence really, but it seems that if you accept, in the defence world, eight years without it-you are going to use the American and the French carrier capability, I assume, during that period-why not hang on for another three? What suddenly changed? What makes the difference?

Bernard Gray: It is not the only factor; it is a factor. If you then say, "By the way, we have more cost data that say that the CV-the cats and traps version-is going to be substantially more expensive", you then turn to the question, "Do I want to pay more money to get a capability later?" There are a variety of other factors that go into the balance of the decision. It is not purely the capability gap.

Q17 Chair: Okay. I don’t know what your latest indications are. One of the aspects that is so scary about this is that we have very little, if any, control over the final cost of the aircraft; that is more or less entirely in the Americans’ control, as I read it.

Bernard Gray: That is true, but we have increasing confidence in the numbers about what they will cost.

Q18 Mr Bacon: What is the latest unit cost estimate?

Bernard Gray: It depends on when you buy them. Effectively, there is a sort of U-shaped curve. As production rates ramp up, the unit prices fall through the course of this decade, until around 2018 to 2020, when they hit a low point. Then they are at full rate of production and inflation starts to creep up.

Q19 Mr Bacon: What are the numbers at each of those points?

Bernard Gray: For each of the variants? Or for the-

Mr Bacon: The variant you are going to buy, rather than the variant you aren’t going to buy.

Bernard Gray: I struggle to remember whether it is in any sense commercially sensitive. From memory, the rough number is around $115 million per C copy.

Chair: But the GAO, in its recent reports that I have seen in a House of Commons briefing, has repeated its concerns about affordability, the lifetime costs, and the problems with the evaluation, whereby people who have flown it said that it will get "showdown" every time-significantly below the programme office’s projected targets. That was of February 2013. Aircraft suffered critical failures of equipment every 3.9 flying hours on average.

Q20 Mr Bacon: Can I just check with the NAO? The number that I remember from last time was £127 million. Was that right? Did I remember correctly?

Tim Banfield: The numbers are moving around, and that would have been for a different variant as well. It would very much, as Mr Gray was saying, depend on where you were on that learning curve as to what would happen.

Mr Bacon: At the end of the day, I would take the total number of planes and divide it by the total amount paid to get an average unit cost.

Bernard Gray: But we also have paid a significant amount into the development phase, so it is not just the production cost but our share of the development cost. It is probably best if we send you a note on the phasing across the decade in the currently projected unit production cost.

Q21 Chair: Can you answer the question about what the assessment seems to suggest and the reports flying around in the States: that the costs are likely to escalate and that we have not seen the end of the costs? The feasibility of the plane also has a question mark on it. There is a lot to be got right on it.

Bernard Gray: With the exception of significant problems that they have had with the helmet, where they have a complex helmet that gives you a head-up display and actions on it, which has been technically very significantly challenged, and a couple of engine issues, they are working through parallel development and production, which is causing the sort of issues that you are talking about. But there aren’t any-if I might call them this-showstoppers in that. They are working through issues, but the level of confidence about both the B variant and the C variant-the STOVL variant and the carrier variant-is going up all the time, so I don’t recognise that characterisation.

Q22 Chair: You don’t recognise the characterisation of the GAO-

Bernard Gray: Of saying that this is-

Q23 Chair: This is taken out of a GAO report that is in a House of Commons briefing.

Bernard Gray: I understand.

Air Marshal Hillier: I have read that report and I think it needs to be seen in the context that we are five years away from when we are declaring our initial operational capability for the aircraft, and our experience of these complex programmes is that you will see technical issues like this arising through their development, but in terms of the aircraft that we are buying, the B model-this does play back, I think, to the 2010 decision. At that point, the B model was seen as a much riskier proposition than it is now. It was on probation in the US. It certainly isn’t now. Last year, the US Marine Corps flew two aircraft for three weeks off one of their carriers-a B model. They are going to do another exercise this year. That gives us much greater confidence that this aircraft will achieve what we want it to do. There will be technical issues along the way, but that is in the nature of these complex-

Q24 Chair: And cost issues along the way? Are you expecting the price per unit to go up further?

Air Marshal Hillier: It would be for Mr Gray to answer-

Bernard Gray: No, not right now.

Q25 Chair: Not right now.

Bernard Gray: Well, I do not have any information that says that it would.

Q26 Chair: None of this stuff, none of this technical-

Bernard Gray: The parallel development and production activity has all been in train for about five years, so that is a known characteristic. The thing that would affect the unit production price would be if the US were to significantly reduce its offtake in the course of the next decade, where we’ve got all the fixed costs of setting up the production lines, and then it depends on how many aircraft-

Q27 Chair: So if one of the other countries pulls out as well.

Bernard Gray: But the US is by far the predominant buyer and therefore it would have the biggest impact.

Q28 Ian Swales: One of the things that I did in preparing for this hearing was read the transcript of our previous hearing on 11 July 2011. One is struck by the feeling that the best answers were given on the day, but they don’t bear a heck of a lot of relation to the current report, so that undermines our confidence that we are getting a thought-through position today. Let me refer to one specific in illustrating that.

Question 111 of our previous hearing was about short take-off and landing planes, and in his answer Rear-Admiral Hussain gave four reasons why we were not going down that route. One was that the aircraft is inherently more complicated. It has an extra engine. It is doing difficult things, so it is going to be more expensive. The second one was: "It had a smaller bomb bay. That meant that, for the integration of UK weapons, we were going to have more difficulty…Third, because of the nature of a short takeoff and…landing aircraft…especially in hot climates", it probably needs to dump its weapons before it lands. Fourthly, "the sheer heat and power from the STOVL had an impact on deck coatings. That was more work, another risk that we were going forward with…that amount of heat and blast from the aircraft." So my question is: to what extent has an overall financial case been done-not just in relation to getting rid of cats and traps, but the total case, so that we do not see another table such as figure 3, where there are five things we forgot to think about?

Air Marshal Hillier: Perhaps I can start off against those four headings. First, on the complexity point, that was the judgment in 2010 and in 2011, but as I mentioned earlier, we have got much better data, particularly as a result of what the US Marine Corps have been doing, and there are no greater risks in the STOVL version of the aircraft now than there are in the C model. On that issue, we’ve now just got a better understanding of it and it doesn’t apply.

In terms of the weapons issue, it is absolutely true that the C model has a larger weapons bay than the B model. However, the weapons that the UK intends to put on or in this aircraft fit into the B model weapons bay, so although the C has a bigger weapons bay, it doesn’t matter for the weapons that we are planning to put in. You might say, "Well, there’s an issue there about future flexibility," but just dealing with the information and the decisions that we have in front of us today, it doesn’t matter.

Q29 Ian Swales: I would like you to come back to the other two points, but let me just interrupt you. The actual quote about weapons was: "Having the larger bomb bay in the carrier variant should make some of the integration of UK weapons, which we consider to be a sovereign capability, relatively easier to do." So have the weapons systems changed, or was that answer not true?

Air Marshal Hillier: The particular weapon that I believe that he would have had in mind there at the time was the Meteor air-to-air missile, which we had a concern about-would it actually be too big? There was a modification that we have now been able to progress, which means that it fits in, so I suspect that that is what he had in mind.

Q30 Ian Swales: Were you progressing that modification anyway, or is that more costs we have incurred in order to change this decision?

Air Marshal Hillier: It would have been progressed anyway, because originally we were going for the STOVL variant. We went to the CV and then back to the STOVL, so the work would have been in hand anyway. I suspect, I can check, it was probably put in abeyance when we went for the CV, but we came back to it and, as I said, that is not an issue.

Q31 Ian Swales: Sorry, just to be clear for Mr Thompson, what you have just described there is another bit of financial cost associated with this decision. Has that been taken into account in the overall decision-modifying a particular weapon system? You said that the work was probably in abeyance and now it has been restarted.

Air Marshal Hillier: Yes, it was assumed as part of our work for the reversion. We went through an extensive process of identifying every potential cost, and actually we laid off a significantly greater amount of risk money-if you like-against weapons integration, which we have gradually been able to reduce subsequent to the decision we made in 2012. On the point about will the aircraft have to jettison weapons and heavy weight, then again there was another capability, which was under development of the SRVL-Ship-borne Rolling Vertical Landing. Instead of landing vertically, it can land at low speed on the deck. That allows it to land in the appropriate weapons configuration without jettisoning those weapons. We had previously been assuming that we would do that. We stopped doing that work when we went to CV. As part of our reversion, we put that work back in again and it was fully costed.

Q32 Ian Swales: Can I just stop you there? Again, from the same answer, "In order to get round that, we were planning on a rolling landing." Again, that is something that no one else is doing. It was going to be innovative in itself. That was an issue that we worried about. We thought we were able to deal with it, but it is still a risk and it is a risk that we have now removed, having gone the other way. Is it true that this is something that no one else has done and we are not sure how it will work?

Air Marshal Hillier: There is nobody else at the moment who is planning to put this into their capability, but they may wish to use it in future. Is it the highest risk in the programme? No, it is not. The fact that it is a capability that only the UK is pursuing at the moment does not mean that we should not pursue it. It is something that we have a solution for. Yes, there are risks; there are risks in any of these, but it is properly bound and properly costed in there, so at the moment we have confidence that we will be able to deliver that capability.

Q33 Ian Swales: How would you cost that risk-just to help us understand how you do these things? You are saying that it is a risk that has been costed in. What has been costed in?

Air Marshal Hillier: It is a technical capability, because you need to mark up the flight deck on the aircraft carrier. You need to put in appropriate lighting to guide the pilots as they are landing, and there is a software capability in the aircraft itself, so these are technical issues, which you can develop a solution to, properly bound and put in appropriate risk money against. It is also worth emphasising that this is not an everyday occurrence. This is a powerful aircraft, and we are talking here about it being in particularly hot conditions when it is carrying a full weapon load and a large fuel weight coming back on to the ship. It will not happen every day.

Jon Thompson: You asked whether the costs were included. They are included on figure 5 in the NAO Report, as best as we can estimate them at the time we made a decision.

Bernard Gray: The other strategic backdrop to this is that in a programme such as this you are always looking at a balance of risks. What Admiral Hussain’s evidence did not lay weight on are the technical risks associated with the development of the catapults for example, which were significant. It is looking at a number of reasons-I appreciate that you have to make a judgment in the round about this-why he might go in one direction. What the financial and technical data we have in here suggest is that there is a clear difference between STOVL and CV, which is not likely to be tipped in a different direction as a result of some other variables. The gap between the two is very large to the extent that my question would be how do you validate the original decision, not how do you validate the reversion decision? The reversion decision fundamentally allows for the possibility of running aircraft carriers for 100% of the time, as opposed to 60% of the time, and saves significant money in the process.

Q34 Ian Swales: I understand that Mr Gray. My question is simple: are we making the right decision now? Will we see another table in one of these annual reports with "Oops, we forgot about that"?

Bernard Gray: No. Believe me, we looked at this very carefully. Changing this decision was not straightforward. We went through an exhaustive exercise within the Ministry of Defence looking at all of the options to make sure that we had flushed out all of the issues and the associated risks.

Q35 Ian Swales: The fourth area was the cost of the deck having the power and blast of vertical take-off. What is the extra cost of what you have to do to the deck to take this different type of aircraft?

Air Marshal Hillier: I don’t know a precise figure. I am sure that between us Mr Gray and I could come back to you with that precise figure, but I can assure you that that was part of the analysis that we worked through. I don’t think it is as big an issue as perhaps might have been portrayed in 2011. Certainly, now we have the practical evidence of the US Marine Corps having done this for three weeks, it does not seem to be as big an issue as perhaps might have been portrayed then.

Q36 Chair: What I was going to ask about the change in 2012 is that you lose capability. You lose capability on distance and you lose capability on the amount paid out, don’t you?

Air Marshal Hillier: Shall I start on that?

Chair: Let me just finish my thoughts. You have changed your mind on capability three times in two years, so what confidence can you give us that you are not going to come back in six months’ time with yet another view on capability?

Air Marshal Hillier: I can give you that confidence.

Chair: Well, you probably won’t be in the job.

Air Marshal Hillier: I will.

Jon Thompson: I can assure you that he will, Chair.

Air Marshal Hillier: In terms of the difference between the B and the C model, there is no doubt that the C model is a bigger aircraft with a longer range and it has the potential to carry more weapons, so in itself the aircraft is more capable. However, the judgment we made is that getting a more capable aircraft, at least three years late at considerable additional cost, was not as good an option as getting a slightly less capable aircraft three years earlier, both at a cost we could afford and with a balance across into other priorities in the defence budget. It is worth pointing out as well that the B model is many times more capable than the Harrier which it will replace. It goes further; it goes faster. It is a fifth-generation combat aircraft. It is overall much more capable than we had in the past. On the point about whether we are going to change our minds again-

Q37 Chair: I accept it is better than it was in the past, but you were going for something that gave you this deep offensive capability, whatever it is, that you are going to lose.

Air Marshal Hillier: But that "Well, if we could afford it and the technical risks were solved we might get a better capability at some point in the future", to me, as the capability sponsor, is not as good as "This is a lower-risk technical solution that we can afford and we can get it earlier." I would rather go for that. It is not just me saying that. It is important to highlight that the Armed Forces Committee, which is the chiefs of each of the services and the CDS, agreed that that was the better capability option to go for-

Q38 Chair: Better than what?

Air Marshal Hillier: Better than the C model. It was better to go for the B model-

Q39 Chair: Why? Driven by budget rather than capability?

Air Marshal Hillier: No, it was because you get the capability earlier and you have a much better guarantee of getting that capability because of the lower technical risk, so that is what the Armed Forces Committee agreed. In terms of the deep and persistent capability, which the C model was partly designed to address, the Armed Forces Committee again agreed that that part of the requirement could be postponed until we looked later on, and we are talking into Typhoon replacements, because the balance of capability, risk and priority meant that it was more important to get the earlier carrier strike capability.

Bernard Gray: The key thing turns around whether you are putting one aircraft up against another single aircraft. On a like-for-like basis, just on those aircraft, what you say is correct; the C variant is more capable than the B variant. That is the point that the Prime Minister made in his Commons statement.

Not only do we get the capability earlier, but we have the option now to use both carrier decks, which allows us to have that capability for 100% of the time. If we had converted The Prince of Wales to catapult operation, we would only ever have had one aircraft carrier available for about two thirds of the time. Therefore, we would have had about a third of the time with no capability at all for carrier-based operations. For argument’s sake, you have one aircraft that is 80% as capable as another but it is available 100% of the time, or 100% capable aircraft available 65% of the time.

Q40 Chair: We said that of the 2010 decision. We did, didn’t we?

Bernard Gray: You were right.

Chris Heaton-Harris: Chair, you are always right, so it is well argued.

Chair: Not according to the accountants, I’m not.

Q41 Chris Heaton-Harris: My question is basically on the theme of re-specification, because it is something that the MOD has done really badly in the past. Now you have made your choice, how are you going to stop Air Marshal Hillier changing his mind on the specification of the aircraft in future? What sort of contract do we have that helps us keep those costs down?

Jon Thompson: The answer to your first question is that we significantly enhanced the governance that surrounds investment decisions in 2011, which was subject to a review by our friends at the NAO and a public Report about the discipline that we had put in to making decisions about changing requirements.

There is a connection between our overall strategy and the amount of money that you have got available and you have got to balance those two things. We did significantly enhance the Investment Approvals Board, which my colleagues are both on; it comprises seven people. There is now a process of significantly enhancing the scrutiny of business cases. If Air Marshal Hillier wants to change the specification of the requirement, he has to go through seven independent people before he goes to Ministers in order to get that.

Bernard Gray: To add to the point, as it turns out, Air Marshal Hillier is an incredibly disciplined individual who does not come to me trying to change his mind.

It is also the case that this particular aircraft is not, as the Chair said, designed by us. It is quite difficult for us to change the specification of the aircraft. We would have to go in and argue for and pay for and negotiate the cost of any variations before we altered that. As far as the aircraft is concerned, fundamentally we are a price taker and a capability taker of what the defined programme is. It is not really in our gift to be able to vary that. We have a process for negotiating with the programme office in Washington about when we want to buy the aircraft and what, under the sale system, the price of their aircraft is, depending on which year we are buying it, which is the question we were asked earlier.

We have effectively a benchmarked cost for the fly-away price of aircraft. I am currently discussing with the US our forward buy, for example. That price is a benchmark price that comes out of that process. The specification is set and the price is a pretty open benchmark.

Air Marshal Hillier: Could I just add a final point? The other incentive to ensure that I do not change my mind is that I am now the senior responsible owner of the programme.

Q42 Chair: But how long are you going to stay there?

Air Marshal Hillier: I anticipate being in my current job for probably another two and a half years.

Q43 Chair: And you have been there for how long?

Air Marshal Hillier: About a year and a half so far.

Jon Thompson: Air Marshal Hillier’s posting is one of the new double-length tours introduced on the back of the Gray report in 2009.

Air Marshal Hillier: So I am accountable to the permanent under-secretary for the delivery of the carrier programme and the component parts of that. I would undermine myself if I were to change the specification.

Q44 Chris Heaton-Harris: The Committee has constantly, throughout its history, raised these sorts of concerns. I am very pleased to see the changes being made, and I am sure the Committee is, but I want to try to hammer your feet to the mast, as it were, to make sure you are not going anywhere. Should you, and should things change, we have nailed you on the evidence you are giving today.

Jon Thompson: The Committee has had a consistent concern about SRO appointments, and the reporting of subject costs and so on. We have specifically changed the SRO policy with direct accountability. The board now has a monthly report on the status of the top 50 Government programmes–whether they have changed over the last reporting period. The Secretary of State now chairs a board called the major projects review board, which looks at projects about which we have some concerns, supported by both of my colleagues.

Q45 Austin Mitchell: I am just trying to get my mind around all the delays and the arguments about whether it will be available in 2018, 2020 or 2023. It looks to me, as a total ignoramus on this matter, as though that must have something to do with this Crowsnest operation, without which the aircraft carriers are very exposed. Unless you have got some plane up there spotting the incoming attacks, these are terribly big beasts and easy to hit, I would have thought. The initial question therefore is, why was Crowsnest postponed in 2012 if we were going to go ahead with the carriers and use the carriers? Why was it postponed, so the carriers wouldn’t have the protection of Crowsnest?

Air Marshal Hillier: We define the Carrier Strike capability that we will be delivering in 2020 as bringing together the ship and the F-35B. We have defined it consistently as our initial operating capability from the maritime environment. The Crowsnest capability has never been part of that definition.

Austin Mitchell: You will need a lot more ships round about to protect it, won’t you?

Q46 Chair: Austin, if you look at figure 12 on page 35, it puts Crowsnest-if I am reading it properly-as an essential capability for the Carrier Strike capability. So it isn’t an add-on, it isn’t an afterthought, it is essential.

Air Marshal Hillier: We have never defined it as being essential for the initial operating capability. The way we introduce capability-

Q47 Chair: Sorry to say this to you, but you guys sign off on these Reports. That was a definition-

Jon Thompson: Sorry, we don’t.

Q48 Mr Bacon: Was this Report not cleared? Normally they are.

Jon Thompson: Well, we could have an interesting diversion into whether it was or was not cleared. In my opinion, it was not finally cleared in relation to the specific issue of Crowsnest.

Q49 Stephen Barclay: That is interesting, because we had this last time when there were discussions and multiple Reports going back and forth. Germane to the point being raised, footnote 11 on page 24 says, "By the end of 2020, under current planning assumptions (which have not yet received investment approval)". Perhaps you might want to clarify what has not received investment approval, and therefore what uncertainty remains.

Air Marshal Hillier: I will tie that in, if I may, to continuing my previous answer. When we have that initial operating capability in 2020, we will have a highly usable Carrier Strike capability. For the early warning that you mentioned, we will have at that stage a greater reliance on either allies or our Type 45, which is a very good air defence capability, or some land-based airborne early warning. Why is that acceptable? Because we are at initial operating capability.

Mr Bacon: When you say land-based, do you mean-

Q50 Stephen Barclay: Just a second, Richard. That is not what the Report says, Air Marshal. If you look at that footnote, you see that what it says is, "in extremis," you will "be able to deploy two Crowsnest systems without full mission capability, testing or clearance for operational use." This is based on investment that has not been approved.

Air Marshal Hillier: As I say, in 2020 we will not have a fully deployable Crowsnest capability. That reflects the fact that we are at initial operating capacity.

Q51 Austin Mitchell: Without Crowsnest, it is not only highly usable but highly sinkable.

Air Marshal Hillier: As long as you make the assumption that we will not be working with allies or that we will not have any of our other capabilities. It may, in certain circumstances, constrain where you are able to use the carrier capability, but that is reflected in the fact that it is an initial operating capability.

Q52 Austin Mitchell: Do the Americans have a Crowsnest system?

Air Marshal Hillier: They have a different airborne early warning system, but that, I think, reinforces-

Q53 Austin Mitchell: And is that extendable to us?

Air Marshal Hillier: No. It is a fixed-wing and it would require cats and traps to operate.

Chair: Say that again.

Air Marshal Hillier: It is a fixed-wing aircraft that the Americans use, which would require cats and traps-

Q54 Chair: So we cannot use it?

Bernard Gray: We cannot operate it from our carrier, but if we were operating with the Americans, we would have the benefit of it.

Q55 Chair: Why? How? Do you mean they would be in the same area?

Air Marshal Hillier: Yes. You would be able to use other nations’ capabilities. As we then introduce the Crowsnest capability, that works us up to full operational capability with Carrier Strike, at which point we will have the Crowsnest available.

Q56 Stephen Barclay: Is what we are saying that we could not use this against, for example, a Chinese, Russian or other sophisticated enemy, but we could use it, perhaps, off the coast of Libya for operations such as that, or we could use it if the Americans were alongside us phoning us warnings as and when something happened?

Air Marshal Hillier: In those sorts of scenarios-this is exactly my point-we would be working alongside allies and we would be able to share capabilities. This is part of the interoperability piece.

Q57 Austin Mitchell: If we are not, not.

Air Marshal Hillier: That reflects the fact that there is a difference between initial operating capability and full operating capability.

Q58 Stephen Barclay: Take a scenario such as the Falkland Islands. If that scenario were happening in 2020, would the carrier be fully operational or not?

Air Marshal Hillier: That reflects into the footnote that you mentioned, namely that by the time we get to 2020 we will own four Crowsnest helicopters, of which two would be available to deploy in extremis. Why would we not do that straight away? Because we are building up the force and we do not want to compromise that if we can avoid it. What we are trying to do here is just do a sequenced, incremental introduction of capability, which is the least risky way to do it.

In terms of this approach that I have outlined, this has been fully endorsed by the armed forces committee, and they have agreed that the definition of carrier capability in 2020 is the carrier and JSF with a growing Crowsnest capability. The point about the approvals is the fact that we have yet to give main gate approval to the Crowsnest programme. What I do not want as a senior responsible owner is to be in the position of making commitments until those approvals are in place.

Q59Austin Mitchell: So the statement that it will be in operation by 2023 is still subject to possible refusal of approval?

Air Marshal Hillier: Well, it is subject to approval because what we have to go through is that disciplined process of making sure that we understand what we are proposing to buy and when it is deliverable, and ensuring that it is properly affordable. That work is in progress, and I believe that the main gate for Crowsnest is in 2014, but I would have to check-

Jon Thompson: It is spring of 2014.

Air Marshal Hillier: So it is in our programme and we have the funding identified for it, but until it goes through that main gate approval process, it results in footnotes like that. I think it is important that we highlight those conditions that are in place.

Q60 Chair: The funding is not in this spending review settlement; the funding is an assumption into the next.

Air Marshal Hillier: We run a 10-year equipment programme, and it is in that programme. I should also point out that we are constantly looking at the potential to bring this programme forward, but we will only do that as part of making sure it is properly affordable within our programme. This is the discipline that we have in our equipment programme. We will only commit when we need to and when it is properly affordable.

Bernard Gray: Can I momentarily illustrate those three examples about how we would actually tackle that problem? In the first instance, in a Libya-type operation, we would have the ability to fly our AWACS aircraft from Italy, so we would be able to use land-based air in the Mediterranean or any of that kind of environment to give air picture cover that would cover the carriers as well as Type 45 destroyers, for example.

In relation to some major state-on-state conflict-without getting into unnecessary names-the probability is that we would not be in such a conflict without being in operation with allies. If there was some major, out-at-sea engagement, we would likely be with French or American carrier groups and operating under a total air picture recognised and partly provided by them and partly provided by our destroyers.

In the case of the Falkland Islands defence, we would go in the direction that the Air Marshal said: from the outset of the availability of the carriers in that kind of extremis, if we did not have access for some reason to the Falklands airfield itself, we would use the developing capability. Those are the three different ways in which you tackle that problem.

Q61 Austin Mitchell: They are still exposed to an Exocet missile in a large conflict: protected by the Americans or not, they are still exposed. These big things putting to sea are almost as exposed as the Hunter was in 1940.

Bernard Gray: They are defended in depth; any military system is vulnerable to a weapon, but they are defended in depth and it is extremely difficult to get close to them for the range of the kind of stand-off weapons that you are talking about.

Amyas Morse: Just to be sure I understand this: I am not getting involved in debate about the Report. I think it was a pretty unfortunate incident, actually-that whole thing. Just to be clear: if there was further escalation in the cost of the Joint Strike Fighters we are going to have, because there was a reduction in the amount of off-take or any of the other things that might happen in the years to come, then the chances are it would be more difficult to bring Crowsnest forward-right? So is it in the same budgetary package, or if there are other pressures on the programme, cost-wise, what will happen?

Bernard Gray: Just for clarity, Crowsnest is currently intended to be fielded in the time line that we have here, so we will have initial capability by the end of 2020; full capability by 2022. What Steve is saying is, is there any possibility to accelerate the deployment of that?

Amyas Morse: That is just what I was asking about; and presumably, is that seen as a total budget package in Carrier Strike? In other words, if you had slippage in some of the biggest cost components in Carrier Strike, is that likely therefore to mean it is not very probable to bring Crowsnest forward?

Air Marshal Hillier: The first port of call would be within the overall programme envelope, but I think we would pretty quickly be looking across the span of the equipment programme and deciding what our priorities would be.

Amyas Morse: But your answer was that it is first of all in the programme.

Air Marshal Hillier: First of all in the group, but that answer doesn’t imply that if there is any cross-growth in JSF then Crowsnest is going to get delayed further. It is just good programme discipline that if you have programme pressures then you should look at dealing with them-

Amyas Morse: My own need for asking it is to be clear-this is a discussion about how in a lot of circumstances Crowsnest isn’t going to make a difference, because of allies and because of land-based systems, and so forth; and then how it might be brought forward. Even though there are limited circumstances where we would actually use it, none the less it might be brought forward. I just want to be realistic. If there are a lot of cost pressures out there on this programme that are not resolved that might mean that you weren’t in a position to do that. So, taking a reasonable view of it, we don’t want to oversell the probability of acceleration, I take it.

Jon Thompson: Sure. We don’t want to oversell the probability of what the Air Marshal is saying now, but neither do we want to default to "There is no capability at all." We are trying to be balanced that it is somewhere in between those two extremes.

Q62 Mr Bacon: Can I just ask a bit more about Crowsnest specifically? The Report says the radar will start being tested from 2020. That is on the basis of the delayed investment, is it?

Air Marshal Hillier: Yes. That time line just reflects the funding-

Q63 Mr Bacon: So on the basis of the delay in investment in Crowsnest, it is true, because of the delay, as it were, that Crowsnest will begin radar trials in 2020 and will be operationally effective from late 2022. That is correct?

Air Marshal Hillier: Yes.

Mr Bacon: There is a chap behind you nodding, as well, which may be encouraging.

Air Marshal Hillier: That 2020 date is fixed by our decision to delay Crowsnest; so that is the realistic date of 2020, when we start the radar trials.

Q64 Mr Bacon: Crowsnest is a radar system being developed by the MOD in conjunction with whom? Which supplier? Is it British or American?

Bernard Gray: There is a competition going on. There are two-

Q65 Mr Bacon: You haven’t even appointed the person who is going to do it yet?

Bernard Gray: There is a competition going on. There are two variants of radar under consideration. One is the one we already use for this purpose, and the other is the radar that’s in the F-35 itself.

Q66 Chair: So one is American. Who makes the other one that we use?

Bernard Gray: We make it here.

Chair: BAE-

Bernard Gray: It is Thales.

Q67 Mr Bacon: So it is either Thales or an American one.

Bernard Gray: Yes.

Mr Bacon: And we don’t know which it will be yet.

Bernard Gray: We’re running a competition.

Mr Bacon: I see. And the American one is?

Bernard Gray: Northrop.

Q68 Mr Bacon: Okay. It will sit on the helicopter platform-what helicopter will it sit on?

Bernard Gray: The Merlin.

Q69 Mr Bacon: So there is no development problem with the helicopter-that is already there. It is simply a software problem, as it were.

Air Marshal Hillier: It is integration. You are trying to take an existing radar and put it on to a helicopter it’s not been on before, so it’s an integration issue between the two, but we already own the helicopters.

Q70 Chair: What could change to make Crowsnest unaffordable? At the moment you have not signed up to it-it is in your plans.

Jon Thompson: What could make Crowsnest on its own unaffordable?

Chair: Well, is it one of your top priorities? There is still a bit of "the promised land" here.

Jon Thompson: You may recall the hearing in February about the overall equipment plan and how we had approached that. Crowsnest is part of the core programme-I am looking at Air Marshall Hillier and he is nodding-which is some £8 billion or thereabouts short of the 10-year funding. If there were to be some explosion of the cost of this programme, the first thing we would look at is using that £8 billion of so-called headroom-you will recall that we gave some evidence about that. I also think we gave you some evidence about the £4.8 billion of risk contingency that we also had. Those are the two areas that we would look at for all these programmes. That is one of the reasons we have not fully committed the equipment programme, which I think you have agreed is not a good idea.

Q71 Chair: Do you still have the assurances that you are going to get the 1% increase in real terms?

Jon Thompson: We are still working on that assumption, but even if we don’t get the 1% increase in the equipment plan over that period, obviously the £8 billion would reduce, but you would still have funding available for this programme.

Q72 Mr Bacon: How much is Crowsnest expected to cost?

Henry Parker: There is a range from about 120 to 400, depending on which solution and how long it takes.

Mr Bacon: Is that £120 million to £400 million in sterling?

Henry Parker: The system we had was a more expensive one-

Mr Bacon: But that is £120 million to £400 million sterling, spread over the life of the programme?

Bernard Gray: That is correct.

Q73 Mr Bacon: And it will sit on how many helicopters?

Bernard Gray: Eight.

Jon Thompson: Eight.

Henry Parker: 12 or 16.

Mr Bacon: Four, 12, eight-any more bidders?

Bernard Gray: Eight.

Air Marshal Hillier: It is important here that we should not commit ourselves to a number of aircraft because we are looking at a requirement, but we need to see how much it’s going to cost. One of the levers we will have if the costs increase is to examine the number of platforms we fit it to, so it would be premature finally to commit ourselves and say, "It is this number."

Q74 Mr Bacon: You mean that if it costs an arm and a leg, we would put it on only one and a half helicopters, so to speak. That is what happened with the Chinook HC3, isn’t it?

Jon Thompson: In extremis, given that there are public expenditure constraints, if what we have to do is change the requirement, we have to look at changing the requirement.

Bernard Gray: The cost of this capability is between one and four JSFs, to put it in context.

Q75 Chris Heaton-Harris: On the same theme, in the United States there has recently been the sequester. There have been reports in the international press that Lockheed Martin said that cuts are likely to inflate the final cost of the F-35 itself. That raises an interesting question: have you bolted down what we are paying, as it is not an off-the-shelf purchase? Related to that, what if the dollar against the pound moves massively-have you accounted for that?

Bernard Gray: The way the pricing mechanism for everybody, including the United States, works at the moment is that they are in an LRIP-low rate initial production-process whereby they are ordering batches that are successively coming down in price as the batch numbers increase and the maturity of the aircraft increases. We have been on a downward course in the LRIP process, and I think we are now on LRIP 8. We will negotiate two years ahead of time for the aircraft we are proposing to get-this year and next we will be negotiating over 2015-16 deliveries. So not all those aircraft costs are yet nailed down, because everybody is negotiating two years in advance. The lead negotiator on all that is the Pentagon with Lockheed Martin, because they are 10 times the volume that we are in the marketplace, or thereabouts.

We have some forward price visibility. There is a lot of work going on, some of which has been cited already, where the CAPE, which is the US version of the cost assurance service that we run, has been modelling the costs of initial acquisition and support. There has been a lot of interrogation of that and there was a significant negotiation between Lockheed and the Government in the last big LRIP.

We have some forward visibility, but not full forward visibility, on the unit prices. We know what the US’s short-term plan is for the acquisition of the aircraft over the next few years. We wait to see whether sequestration has any further impact on those, but it has had a modest impact so far. As far as the sterling-dollar exchange rate is concerned, you are right to say that we are exposed to it. We forward-hedge in the way we have discussed previously here. That effectively gives us some smoothing, but ultimately, if there was a significant move in the dollar-pound exchange rate, that would affect us at some point.

Q76 Chair: Is there still this ridiculous rule that you are only allowed to do it on one day a month?

Jon Thompson: Do what?

Chair: Buy forward and cover yourself for exchange rate movements. Am I right that there is only one day a month that you are allowed to do that?

Jon Thompson: We use the Bank of England to have a four-year layered rolling hedge, if you really want to get into it.

Q77 Stephen Barclay: The liability was shifted to Departments from the Treasury, was it not?

Jon Thompson: Yes. We have a four-year rolling programme. Every year we purchase 20% of what we think the next year’s use of foreign currency is for both the euro and the dollar. We buy about £2 billion of both. We are sitting on positive hedges of several hundred million pounds in the accounts. Off the top of my head, I cannot tell you what it is.

Q78 Chair: We had this absurdity in a session here with the FCO. We found that Government Departments are only allowed to deal in foreign exchanges on one specified date per month.

Jon Thompson: I am not familiar with the Foreign Office’s situation. All I can tell you is that we have a programme with the Bank of England on that. We also forward-hedge oil prices.

Q79 Stephen Barclay: The point, just to be clear, is that while it is very positive at the moment and you are in profit on the hedge, within the known risks of the programme there could be a loss to the programme from exchange rates. That loss would need to be borne by the Department, and not by the Treasury.

Jon Thompson: True.

Stephen Barclay: Or there could be a surplus.

Bernard Gray: The point I am making is that all hedging does is average it over time, fundamentally. That allows us to have some forward predictability, but it probably does not, one way or another, affect the outcome. We are exposed to significant dollar costs in the programme, and we therefore do have foreign exchange risk.

Q80 Chris Heaton-Harris: On a completely different topic, is there a difference in cost between the manned and unmanned version?

Bernard Gray: Of?

Chris Heaton-Harris: The F-35.

Bernard Gray: There isn’t an unmanned version.

Chris Heaton-Harris: Sorry, I thought there was.

Q81 Austin Mitchell: I am just worried about how much brass we have got tied up in these great big lumps. We have got these two huge aircraft carriers, which frankly are of no use. I cannot see any conceivable use for them in any conflict that we have been engaged in or are likely to be engaged in. They would have been of no use in Libya. We managed without them. We would manage without them in Syria-if we actually do anything there. The cost is enormous.

Paragraph 3.7 expresses the hope that strategic alliances will be "strengthened" if the US is able to help us and protect us to lumber these beasts into action. If we do lumber the beasts into action, paragraph 3.7 also says that operating continuous capacity will cost £25 million. If we were to operate both carriers simultaneously, it will be £60 million a year. That is not funded and no decision has been made on funding. The Crowsnest stuff is not funded. There is all sorts of stuff in appendix four that is not funded, either, that will be necessary, such as adapting the Merlin helicopters to use aboard the new carriers. Some Solid Support Shipping is over 30 years old. There is a huge cost there, which will have to be funded at some stage. We then have the costs of the big nuclear submarines, which we are not going to give up, for prestige reasons. So much of the Navy’s operational funding will be tied up in big beasts. It will not leave much for little things like frigates and destroyers to chug round the world and be used in battle. Are we tying up too much of the Navy’s resources and our expenditure in these big monoliths?

Jon Thompson: We are significantly recapitalising all Navy assets over the next 10 to 15 years. That is correct, but it was the decision of the SDSR and "2020" that we would proceed on that basis, and I think it was the decision of the previous Government that we would proceed with the two aircraft carriers. That was the policy decision. To be clear about what is and is not funded, Crowsnest is funded. That is the answer that Air Marshal Hillier gave you.

In relation to paragraph 3.7, what this decision does is give a future Government and the SDSR in 2015 the option of running both carriers. Under the 2010 decision, that option was not there, so this does give optionality, and we have tried to cost that so you can understand what 100% availability is-or running both carriers. Those are what the numbers are in paragraph 3.7. We have not funded that, because we think that is a decision for the Government in the SDSR in 2015.

Q82 Austin Mitchell: I can see that, but wouldn’t it be more sensible to rely on the Americans for the big stuff and for us to run a proper nice little Navy?

Bernard Gray: To give you a feel for the size of things, the proposed Type 26 frigate replacement programme is not quite, but of the order of, twice the size of the cost of the Carrier programme, so it is not the case that we are spending all the money on aircraft carriers and no money on escort vessels. We have just spent-from memory-£6.5 billion on air defence destroyers, so we have invested significantly in service escorts and will continue to do so.

Q83 Stephen Barclay: That is where I just wanted to clarify things. How many Type 45 destroyers do you need once the Carrier group is fully operational?

Air Marshal Hillier: In terms of the number of destroyers that we would deploy with the aircraft carrier, it will depend on the operation. In a high-end conflict it will be a significant number. I think it is perhaps best not to go into those specific numbers here. If it were just a reassurance mission, there are adaptable carriers that we can use for a range of purposes-for example, non-combatant evacuation-and perhaps you wouldn’t need that, so there is a range that we are looking at.

Q84 Stephen Barclay: Sure, I appreciate there is a range regarding when you can use the group without Crowsnest and when you can’t. But in terms of being able to say, as a working guesstimate, the carrier group is fully operational, how many destroyers would be needed?

Air Marshal Hillier: The plan at the moment is that we will have 19 destroyers and frigates. That was announced in the SDSR. It is very difficult to give you a precise answer, because it will depend on the operation and our allied interoperability. It is difficult to be precise and say that every time we are engaged in this operation, it would have this number of destroyers.

Q85 Stephen Barclay: Sure, I appreciate that, but, as a non-military expert, is there not a rule of thumb between destroyers and frigates? When we deploy now, which I imagine is not a national secret, what is a normal deployment of destroyers and frigates? I again accept that capabilities may change if you have more frigates, but there must be some working estimate that we can go with.

Air Marshal Hillier: I don’t have a figure that I would be comfortable about giving to you now, but I can come back to you and give you the examples of operational deployments and the number of ships.

Q86 Stephen Barclay: When we deploy a carrier group now, how many destroyers does it have?

Air Marshal Hillier: We don’t have a carrier group now.

Q87 Stephen Barclay: What is the cost of a destroyer?

Bernard Gray: Build cost or operating cost?

Stephen Barclay: Let’s go with both: the build cost and the operating cost.

Bernard Gray: The build cost for the Type 45s is about £1 billion each.

Q88 Stephen Barclay: And how many of those do we have?

Bernard Gray: Six.

Q89 Stephen Barclay: It goes back to Austin’s question. What I am concerned about is, how many of those six destroyers are we going to need to use for the carrier group and what are the implications for our ability to deploy destroyers elsewhere?

Air Marshal Hillier: As I say, it will be dependent on the operational priorities at the time. If we are deploying the carrier into a high-intensity operation, then clearly you would put a significant number of those six against that task, and other lower-priority tasks would simply not be covered. If it was a more routine deployment, on an exercise or a low-intensity operation, then you would vary that and you would be able to cover more operational tasks. It is not avoiding the answer; there just is no set answer to this, because it is asking me to define a particular operation. We make assumptions for particular contingencies, but again I would have to get back to you outside of this forum to discuss that, because that is in our secret-level operational planning.

Q90 Stephen Barclay: It may be something that can be picked up in a note. I am trying to get an understanding of the extent to which the areas around the edge of programme perhaps are vulnerable. To what extent is Crowsnest vulnerable; to what extent are the costs of destroyers; and what other parts that are key to a fully operational carrier group are, perhaps, vulnerable to budget pressure, in order to meet the political imperative of getting some carriers to sea? One can understand those pressures-those are real-life pressures-but at £1 billion a go, buying more destroyers is going to have a significant impact.

Bernard Gray: But we have just bought-the last one left the Clyde about six weeks ago-and built those six. Those are the air-defence destroyers that we intend to carry us through until the 2030s, so we have all of the air defence assets that we would expect to have. The aircraft themselves, Crowsnest, the Type 45 frigates, land-based air surveillance and Alliance air surveillance are all part of a multi-layered defence of the carriers. You might have one or two that might go with you one time or you might have a whole package that goes out with, if there was some large-scale operation, but we have built those.

We have existing anti-submarine warfare and general purpose frigates, which will come to the end of their life in the 2020s. The Type 26 programme is intended to replace those and that is going through the assessment phase at the moment, and will come into its main gate around the end of next year. We will then move into production of those, where we are intending to have the balance of the force composed of those Type 26s.

Jon Thompson: Can we try and answer your question by referring to figure 12 on page 35-the one the Chair referred to earlier? I think your question is, which of the capabilities in the grey circle on the left might be at any kind of risk?

Air Marshal Hillier: Those are all capabilities which contribute into Carrier Strike. The key thing is they also contribute into a lot of other things in defence, as well. We look at C4ISR-that is our communications and our reconnaissance capability-so, yes, they contribute there, but there are wider implications across defence. Can I absolutely guarantee that none of those programmes will be touched, and that they will completely protect the carrier capability? We cannot do that at this sort of range because, again, they are complex programmes that are expensive and will take a long time to deliver.

The key thing is that, for my responsibility as SRO in delivering the programme, I understand these dependencies. I am not just the SRO for the programme, although in my day job, if you like, as DCDS Military Capability I look at that strategic balance and investment, so I can see where the money is going and so I can directly understand whether or not there is an impact on the programme.

Q91 Stephen Barclay: Sure, but the Report says on page 29 that there is a risk of divergent views-this is between the Air and the Navy forces. It states that the Senior Responsible Owner continues to face difficult challenges. I absolutely appreciate the pressure. We are just trying to get some visibility on some of the other aspects which are components of an effective and fully operational carrier group, and the extent of risk on that. Within that-Mr Thompson is right in terms of the grey area-the Report says that some solid shipping is over 30 years old. Will any of that solid shipping still be in use when the carrier group is launched?

Air Marshal Hillier: Yes, it will, but we have a plan: what we would hope to do is replace that shipping. The key thing is that it is not there just for the carrier; actually, only a relatively small percentage of that solid support shipping is directly in support of the carrier. This is required for the whole fleet.

Q92 Stephen Barclay: But in a way, Air Marshal, that is the exact point that I am trying to make: other capability in other theatres may be put at risk. What you are saying today is that we are going to have solid support shipping, which is over 40 years old, supporting this brand-new carrier fleet.

Air Marshal Hillier: Yes.

Q93 Stephen Barclay: That is also supporting other Navy operations elsewhere. Then, I imagine it is a bit like the air tanker in terms of Afghanistan: we get into huge problems with maintenance, with failure and with it not being able to resupply a frigate elsewhere if we are running very old-

Bernard Gray: No.

Q94 Stephen Barclay: You say no, so by all means come back.

Bernard Gray: We have solid support shipping that works fine and that supports operations today, which we will retire in the mid-2020s. Later on, in this decade, in a planned way, we will come forward with the plans to replace that.

In answer to the question about whether it would be available, yes, it will be available until around 2025 when we will replace it with something else. It is working fine. All of the elements are here: the destroyers and frigates we have discussed. The MARS tankers are on order, being built today and will be delivered in 2016. The lead commando group exist. Steve has discussed ISR. Our mine warfare operations are up and running, and we will have an update plan in the due course for those, but our current Sandown class and Hunt class exist and are working today in the Gulf among other places. We replaced the amphibious shipping and the LPD around the turn of the century, for example.

The point that we are making is that you have a long, rolling programme of replacement of assets over time that come in at different phases. We are happy today that, as Mr Thompson said, we are recapitalising a large part of the Navy, but we are doing so in a planned and budgeted way. It is not that all of the money is being spent on the aircraft carriers and nothing on anything else.

Jon Thompson: Would it help if we gave you a note of these capabilities, where they are, what their service stay is, when they fall out and whether it is in the programme?

Chair: Yes.

Jon Thompson: In relation to the inter-service issue, which you raised, we have used the Armed Forces Committee, chaired by the Chief of the Defence Staff, to balance the various issues in setting the policy-to my knowledge, it has been discussed at least three times in the last 12 months-so that the Chief is the person who gives the ultimate policy advice to balance those issues, working with Air Marshal Hillier.

Amyas Morse: Thank you for that helpful bit of discussion. We are having a discussion about many different ways of providing capability, which we have from time to time. That does not mean that I think it is wrong. None the less, when you are negotiating the defence budget, you must be saying, "Look, we need at least this many of this type," and, "Our range of responses will be very limited if we do not have this or this." In other words, if you are defending the budget and negotiating for the budget, rather than explaining how flexible it is, you must have some baseline numbers that you put forward to have viable structural units of capability.

I agree that you are renewing models, but the other thing we have experienced in the past, is finding that the numbers of any particular class might shrink a bit as we go into actually procuring them because of budgetary pressures. I can understand the Committee’s interest in understanding whether, if we have got this, that impinges or does not impinge, or distorts or does not distort, the rest of the capabilities and responsibilities that you might have. Are you stretched very thin? We had a similar discussion on the way in which you were going to be able to protect nuclear submarines going into action when you were no longer going to have aerial surveillance so you were going to use helicopters for that as well.

Here is a suggestion: the Committee is not being unreasonable in wanting to understand this more clearly. Perhaps you could give some consideration to how you could explain it in slightly more concrete terms. I am not being critical of your answers; I am just saying that I can understand that it is rather difficult to feel whether you have ever got anywhere in the conversation if you cannot say: is the whole thing getting sub-critical? That is really the question, and if you want to be able to do x number of things at the same time, you can only really answer it by understanding whether our capacity to do that now is greater or less than it was a couple of years ago. Pray, explain that. I think that that would be really helpful.

Air Marshal Hillier: I understand that, but perhaps I should just say that we do have some models. The ultimate reflection is in the number of destroyers and frigates that we say we need in the SDSR. The point I was trying to get across is that the methodology that builds up to those numbers is clearly classified. I need to share in a body other than this Committee the operational assumptions that we have made, because, clearly, if we start talking about numbers of ships in particular environments, it is sensitive information.

Jon Thompson: Would it help if we tried to work out a way-it is quite difficult in public-to allow you to engage with how the military capability planning process works and how it results in the programme that Steve runs?

Q95 Chair: We did come across once to have a briefing on the negotiation for something. I cannot remember what it was now.

Jon Thompson: I think it was on the Harrier.

Chair: Yes, it was on selling the Harriers.

Jon Thompson: We will try to work out the mechanics for the operational scenarios and what they mean in capability planning terms, and so on.

Chair: And your staff do not need to feel threatened by that, as they did last time.

Q96 Ian Swales: That is where I wanted to come in. Knowing what you know now, would you have scrapped the Harriers? Who should answer that?

Air Marshal Hillier: I will start off. I was not involved in the decision making at the time, so I cannot comment on what evidence was available. My perception is that the decision made at the time was on what gives us the greatest level of capability. The Tornado was and is a bigger force. It is more capable than the Harrier was, so I think the decision making was based around that.

Chair: That is very much a non-answer.

Jon Thompson: I will try. The answer to your question is that, when you have a budget deficit of £72 billion, you have to decide what you are going to withdraw from service. Ministers decided, on a prioritised basis, that the Harrier was one of the capabilities to withdraw from service. As the Committee is fully familiar with, the Ministry of Defence got itself in an unbelievably difficult financial situation. One of the ways out of that situation was to prioritise and say, "We simply cannot afford to do everything we have done in the past, and some things have to be scrapped." That was the decision the Ministers made.

Austin Mitchell: It was a panic situation.

Jon Thompson: That might be your way of putting it, but the way I put it is that, if you are £72 billion in a budget black hole, you have to do something about it.

Q97 Ian Swales: Obviously, that was short-term thinking at the time. I have two points. First, it is hard to imagine the capability planning that we have just been talking about-planning that we should have aircraft carriers without aircraft.

Jon Thompson: Capability planning is nothing without some frame of reference to what public resources are available to deliver that capability planning. You have to be framed by some resource constraints. I am sure Air Marshal Hillier would have a great long list of other things that he would like to do, but we simply have to be constrained by what the taxpayer makes available.

Q98 Ian Swales: Thinking about constraints, these planes were sold off to America for spares, so they are still using them. Could we have either delayed or made the current procurement project cost-effective by still having Harriers in service?

Bernard Gray: I am a big fan of the Harrier, and I will answer your question directly: yes, it was the right decision. We could not afford to run three types of fast jet. It is not the acquisition cost but the operating cost of keeping, maintaining, having all the spares and training people to use three types of aircraft. We had to choose because of the budget pressure we are under, which is not a short-term pressure; it is a pressure that builds up over the following 20 years. You looked at the budget situation in 2010 and you could see that gap opening out over 20 years. We did not have the money in 2010, 2020 or 2030 to keep running the systems, so we had to make some choices. One of those choices was to come down on the number of types of fast jet that we ran. Harrier was, unfortunately, the least capable of those aircraft. As the Air Marshal has already said, the F-35 is twice as fast, has twice the range and carries twice the payload of the Harrier. It is a substantially more capable aeroplane. So, yes, it unfortunately was the right choice to stick with the Tornado as a more capable bomber than the Harrier.

Q99 Ian Swales: On a different matter, how many people in the Ministry of Defence work in the carrier area? How many staff are involved in this whole exercise?

Air Marshal Hillier: If I start at the top level with governance, then I am the senior responsible owner, but clearly I have other responsibilities as well. As a result of the changes we have put in place I have a two-star, full-time programme director. Within head office there is a further programme office of eight. Then at the individual service commands-Navy command and Air command-they have staff working on those projects. I don’t know the specific number but I can get you that number if you wish. They are looking at the capability planning. In terms of the delivery part of it which is in the DE&S-

Bernard Gray: In the carrier-I will check the number and come back to you-but I have a feeling it is around 100 people working on the ship and probably about 50 people working on the F-35.

Q100 Ian Swales: The reason for my question, and I would appreciate a note on this, is that you rightly use the word "project". Once we get to the point where we are buying ships from people who know how to make them and we are buying aircraft from people who know how to make them, then presumably you stand down a lot of these people and move them on to something else. We only do this every decade or so. The worry we have heard in other regards-I have heard about it from manufacturers-is that there are always lots of Ministry of Defence people here to help you. What they really are doing is re-speccing on a constant basis. How are you going to avoid that happening? What will you give the people to do once they have finished this project of buying two carriers and aircraft?

Air Marshal Hillier: Those sorts of acquisitions are generational activities. We will have the aircraft and the ships in service for 40-plus years. People will change naturally through that time. In terms of when will we get to that ramp-down point in carrier and F-35, it is a long way in the future.

Q101 Ian Swales: I am not talking about the capability. I am talking about the people involved in making these decisions and making it happen. Surely there is a point where you need a lot fewer people, isn’t there?

Bernard Gray: There is the setting of requirements and then there is delivery of the equipment itself. While I appreciate that the defence industry will quite often say that it wishes to be left alone, thank you very much, my experience is that that is not on the whole a good idea. It is fair to say that on most occasions when I have pushed on specific issues, they are not as well covered off as they should be. If I just let a contract and walked away and invited defence contractor A to get on with it and "Do just please drop by and deliver the equipment at the end of it and I’ll write you a cheque", I am unlikely to get that equipment.

Q102 Ian Swales: Why?

Bernard Gray: Because their control of programmes is not all it might be.

Q103 Ian Swales: So we have to get involved in controlling the programmes of our suppliers? Is that it?

Bernard Gray: If I can take you back to the most salient example of this, in the Astute programme we did what you suggested. It was a disaster. From 1996 to 2003 we let them get on with it. We had a contract and that is what we cared about. In 2003, it almost broke BAE Systems. It cost them hundreds of millions of pounds. We then had to step back in, reformulate the programme and effectively recuperate the whole of our submarine-building activity, which is something that is only beginning to come right some 10 years after that disaster.

Q104 Ian Swales: I am sorry to press this, but it is a thing I find very interesting. How many people do you need on the MOD side of the house to see that a programme like Astute is on track?

Bernard Gray: As it happens, on Astute we have about 100 people working on various different components. You are looking bemused, but I can absolutely promise you that-

Q105 Chair: What I am bemused about is that I think you are right that you need the capability; it is just the numbers-I don’t know how you get to those numbers. Much as I love defence contractors-do I?-I wouldn’t trust them.

Bernard Gray: These are matters of detail.

Q106 Chair: A hundred people? I am taken aback by the numbers.

Bernard Gray: These people do a variety of things, which is not just looking at the contractors. We have to handle all the internal approvals, businesses cases and a bunch of other activity. We also have significant safety obligations, where we have to check on the safety of systems, which has been the subject of debate before, for example. There is a variety of tasks that these groups do. My point is that the happy-go-lucky world of us writing out a contract and then allowing industry to get on with it is not one that I live in.

Q107 Stephen Barclay: When we get the figures from Air Marshal Hillier, could we have them broken down by grade and by whether people are contractors, service staff or MOD staff, so that we can see the full picture across the programme?

Mr Gray, you said that the up-front capital cost with the destroyer was £1 billion. The operating cost-

Bernard Gray: That is not my bailiwick. I was just trying to understand whether you wanted capital or operating.

Jon Thompson: We can give you a note on that. It is a Navy command.

Q108 Chair: It is common ground between us that the 2010 decision was poor-I’m being kind to it, but it has led to an 18-month delay. The last time we had an 18-month delay was with the original decision of 2006, or whenever it was, when they signed the budget but did not have the money. That cost us £1.6 billion. How much is this delay going to cost us?

Bernard Gray: We do not have a delay of that kind. We did not stop what we were doing. The way that this was structured was that the adaptations would have been made to the second carrier, not the first. The first one, obviously, is significantly ahead in build, so our strategy has been to carry on building the first carrier and to seek the design changes in the second, so we have tried to capture the costs of that. The contract that we have for both carriers remained in place; we did not stop what we were doing in order to pursue the second carrier’s conversion. One of the reasons for the slippage in the CV option from 2020 to 2023 is a recognition, when we did that work, that it would have taken us much longer to build the second ship with the catapults on it-an action that will not now happen. Therefore we are close to, but not quite on, our original timetable.

From our point of view, in the control of risk and of complexity-you asked earlier about changes-we have made a deliberate effort to avoid Ministry of Defence-specified changes to the original carrier spec, including the treatment of the CV conversion. We held that aside and said, "Build the carriers according to the original spec." Now that CV has been removed-we have quantified those costs-we have the original spec for the carriers, which we are carrying through, so there is not a massive cost associated with the CV and then reversion, and significant delay.

However, the original contract, effectively, is a cost-plus contract. There is a very minor element of incentive on the contractors. I am not satisfied with that contractual structure, which does not put any real onus on the contracting companies to keep the cost of the programme down, and I am worried about their performance to the schedule in order to deliver the capabilities. I am therefore in a significant negotiation with them right now about attempting to change the terms of the contract and to capture not only some significant risk transfer to them, but some costs of items that were originally excluded from the carrier contract. All that is in the context of the shipbuilding industry in the UK as a whole, and I am looking to conclude those negotiations with them over the course of this summer, but it is not yet done.

Q109 Chair: Are you constrained by the industrial strategy? What I mean by that is jobs, to put it crudely. What are the constraints on you in that negotiation?

Bernard Gray: I don’t want to get too far in to this subject until we are clearer, but fundamentally, the military shipbuilding industry has got larger over the course of the past five years as we have built these two very large carriers. It has taken on people to complete all of this work. From a level, it has gone up and will go down. What we need at the end of that process is a modern frigate/destroyer-building capability in the UK, because we are not going to build something of the scale of the aircraft carriers again for a very long time. There will be a decline in that, and that is part of this discussion. It is going from, as it were, an artificial high down to a more sustainable lower level.

Q110 Chair: When we get to the final costs of all these-the lifetime costs, which is another set of costs that tend to spiral and move out of control-how are you controlling those in this particular project?

Bernard Gray: The lifetime costs of the operation of the ship?

Chair: Yes, and the aircraft-both.

Bernard Gray: Of which the aircraft are a more significant cost. We are in discussions with the US Government and Lockheed about how we collectively control the costs of the F-35 in service, because a significant part of how much it costs depends on how the US chooses to configure itself. It has to put in all the infrastructure for all the spares and the logistics management and so on. The costs of that system significantly depend on how the US chooses to do it. That is currently a matter of discussion and is not yet nailed down.

Q111 Chair: So, it is still an unknown.

Bernard Gray: It is still an unknown, but we are involved in that conversation.

Q112 Chair: When you changed your mind on the aircraft, is there a cost associated there, with shifting from one to the other and back again?

Bernard Gray: We have assumed that the STOVL variant is more expensive to maintain than the CV variant, and we have included that cost in our total-

Q113 Chair: I understand that. Are they using the fact that you changed your mind?

Bernard Gray: No.

Chair: They’re not, at all.

Bernard Gray: As far as the US is concerned, it is comfortable with us buying either option.

Chair: Has anybody got anything else? Good. Thank you very much indeed.

Prepared 24th May 2013