Oral evidence: The Defence Equipment Plan 2018-28, HC 1519
Monday 3 Dec 2018
Ordered by the House of Commons to be published on 3 Dec 2018.
Members present: Meg Hillier (Chair); Douglas Chapman; Sir Geoffrey Clifton-Brown; Shabana Mahmood; Nigel Mills; Layla Moran; Anne Marie Morris; Gareth Snell.
Adrian Jenner, Director of Parliamentary Relations, National Audit Office, Jeremy Lonsdale, Director, NAO, Rebecca Sheeran, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury, were in attendance.
Questions 1-153
Witnesses
I: Sir Simon Bollom, CEO, Defence Equipment and Support, Cat Little, Director General Finance, Ministry of Defence, Stephen Lovegrove, Permanent Secretary, Ministry of Defence, and Lieutenant-General Sir Mark Poffley, Deputy Chief of the Defence Staff, Ministry of Defence.
Witnesses: Sir Simon Bollom, Cat Little, Stephen Lovegrove, and Lieutenant-General Sir Mark Poffley.
Q1 Chair: Welcome to the Public Accounts Committee on Monday 3 December 2018. Today we are looking at the National Audit Office Report on the Ministry of Defence equipment plan for 2018-28, which sets out the Department’s spend on defence equipment in the years to come. One little positive at the beginning, Mr Lovegrove: we are pleased that the plan is available earlier than before. However, it is still unaffordable, so we will be probing you a lot on the numbers. In fact, the forecast costs exceed budget by £7 billion over the next 10 years.
You also have the immediate challenge, Ms Little, which we will get into, of the fact that 84% of that difference falls in the first four years. We know that you have a big challenge, and we want to probe how that will come about, and to point out that the National Audit Office thinks that the affordability gap could be considerably higher—£14.8 billion at its outside estimate. It is a big challenge.
I will introduce our witnesses. We have, from my left to right: Cat Little, who is the Director General Finance at the Ministry of Defence; Stephen Lovegrove, who is the permanent secretary at the Ministry of Defence; Sir Simon Bollom, who is the Chief Executive Officer of Defence Equipment and Support—DE&S; and Lieutenant-General Sir Mark Poffley, who is the Deputy Chief of the Defence Staff at the Ministry of Defence. A full suite of people.
I want to kick off with the big challenge about why it is still unaffordable, Ms Little. It would have been a hard job to have turned it around in a year, but we are still in much the same place as we were last year.
Cat Little: It is, yes. I just want to be really clear about the range of affordability, and I hope that the way in which we set out what is driving the financial risks and the affordability position in the report was helpful. As you rightly said, our central estimate of the affordability gap is likely to be around £7 billion, but of course it would be remiss of us not to point out some of the other financial risks that sit alongside the plan.
We know that forecasting over a longer period of time means that there are likely to be further hidden costs down the road. We also have a £3 billion gap between our independent costing estimates and those which we have included in the plan, so we are absolutely under no illusion about the size and scale of the challenge that we have.
The first thing I would say is that the autumn Budget settlement that we reached with the Treasury was an initial acceptance that there are some very difficult choices that you have to make in order to tackle the funding position of the Department. I think the Chancellor himself said—
Q2 Chair: We are going to come on to that. How come we are in the same position as we were last year? What have you been doing over the last year to try to resolve this?
Cat Little: The affordability position has improved. Last year we were looking at a much more extreme range of risk, and much more risk sitting beneath our costing estimates. I think that the NAO has paid due credit to where we have included much more robust costing assumptions in our plan. Part of the approach to the autumn Budget was us being very transparent and clear about the fact that we are facing some very severe financial challenges, and agreeing with the Treasury that we need to look at this in the longer term as part of the spending review next year.
Q3 Chair: I am going to come on to the issues around the spending review in a moment. Mr Lovegrove, lots of people have their fingers in this pie. Who is ultimately responsible for plugging the multi-million pound black hole?
Stephen Lovegrove: Ultimately, when you have an affordability issue such as this there are only two things that you can do. You can either apply more money to it, or you can either run more efficiently or do less with the money that you do have.
Once we have a settled financial position for the longer term, which is for the spending review, clearly the responsibility lies with the accounting officer to make sure that the decisions are taken such that we stay within our funding envelope. At the moment, we are still in a position where we are doing both things.
Q4 Chair: You are doing both things. Is that a tacit admission that you cannot do it all by efficiencies, and that you are going to have to change tack and not do certain things, or de-scope some defence projects?
Stephen Lovegrove: Unless there is a fundamentally different financial settlement for the Department, in due course we will have to de-scope, delay, defer or delete, which is in some senses what I would prefer to do in a lot of cases, because merely delaying often drives cost in, and complexity, as you know.
Q5 Chair: We have seen that. I remember when first coming on the Committee that lots of things were done to sort out the budget. In fact, it just delayed them, and you are still picking up those problems now. You are saying very clearly to us today that without more money the Department and the forces will have to stop doing certain projects.
Stephen Lovegrove: I am certainly saying that. Even if we do get more money, there are all the time lots of —
Q6 Chair: Can you give us some examples of projects that are being looked at?
Stephen Lovegrove: I think that would be pre-empting decisions that are properly for Ministers to make. Almost every single programme and activity that we have that costs a lot, and indeed staffing levels, which also cost a lot, is in the hopper when we are deciding how we are going to make sure that we stay within our financial controls. I am very clear—
Q7 Chair: Well, you are probably not going to cancel aircraft carriers now, given that one is out on sea trials and one will be leaving Rosyth in the next year.
Stephen Lovegrove: No, you are not, although I am not an expert on this—General Poffley would be better positioned to answer it. However, you could certainly make decisions about the deployment schedules of the carriers that have very significant financial consequences, because clearly not only are they very large ships with lots of equipment on them, but an awful lot of equipment has to go round them as well.
There are many thousands of levers in the Department that one can pull to make sure that we stay within our control totals. I am very clear, Chair, that every year the accounting officer is responsible for coming in on budget—that I am absolutely clear about.
Q8 Chair: We will come on to some of the specific programmes in a moment. Lieutenant-General Poffley, what have you been doing for the past year to resolve this gap?
Lieutenant-General Sir Mark Poffley: As you will be aware, the Modernising Defence programme has spent a lot of time analysing precisely how we would match the capability portfolio against the threat profile that we are seeing. As many of you will know, that threat profile is dynamic and shifting. What the work that has gone on this year has done is to make a very clear prioritisation of those things that we need to do in the short term, and those where we need to preserve some choice well into the future.
Q9 Chair: Can you give us examples?
Lieutenant-General Sir Mark Poffley: Again without drifting too far into the Modernising Defence programme—because, as the permanent secretary says, these are pre-ministerial decision—we have taken a very clear stance to make sure that we are able to build some resilience into our structures to counter threats such as that we are seeing from Russia at the moment, particularly in things like anti-submarine warfare and cyber. As you will have noted in the Budget settlement recently, that was therefore the target for some of our investment. So we are very clear about where our top priorities are and, inevitably, there is a debate, depending on where the financial cursor sits, as to the scope and appetite for taking the lower-priority areas.
Q10 Chair: Okay, can we go to the timetabling? This is probably between you and Mr Lovegrove. You talked about ministerial advice; you have got the Modernising Defence programme, which we were expecting to hear about in July, but we are now in December and it is still not complete; we have got the spending review next spring, or whenever—Mr Lovegrove has the same approach as the civil service to spring, whichever point in 2019 that arises—and then, presumably, the SDSR will be on track. Are you expecting a strategic defence review in 2020 on top of that?
Stephen Lovegrove: We have not heard from colleagues in the Cabinet Office that that is, or is not, the case. Certainly, if you were to work on a normal quinquennial timetable it would be 2020—
Q11 Chair: We are at the end of 2018 and you as permanent secretary at the Ministry of Defence do not know yet whether there is going to be an SDSR.
Stephen Lovegrove: I do not know at this point, no—
Chair: Ms Little is shaking her head as well.
Stephen Lovegrove: Plenty of other politics is getting in the way of some of those longer-range decisions. I would expect there to be an SDSR in 2020.
Q12 Chair: Let’s work on the assumption that there is—I will come to Mr Snell in a moment. You therefore have three different ministerial advice programmes—one around capability, one around spending and the third around spending and capability—that are not aligned. Does that not worry you? That you have to shoehorn your decisions into these three different strands of thinking and to come up with some sort of coherent whole that also means that we move towards balancing the budget.
Stephen Lovegrove: If they were not aligned, it would worry me.
Q13 Chair: You think they are aligned.
Stephen Lovegrove: They will become aligned.
Chair: Your knighthood is following.
Stephen Lovegrove: We are hopefully coming to the end of MDP—the Modernising Defence programme—at the moment, and I think that the Secretary of State has said that he had hoped to say something about that before Christmas. He did report to Parliament in July with a statement outlining some of the progress that we have made—
Q14 Chair: Very generous to call it a statement—it did not say a great deal. Anyway, you can’t say that about a ministerial statement—
Stephen Lovegrove: I am very happy—
Chair: At least you reported to Parliament on time, even if you didn’t say anything.
Stephen Lovegrove: A lot of what has been going on in the MDP has been completely visible all the way through—the way in which we are thinking about the operating model, the way in which we have been thinking about our strategic supplier framework, and the way in which we have sought to clean up, clarify and codify for the future our efficiency programme. We have been pretty open about all of that stuff. I suspect that when the MDP does conclude, in those areas, for example, there is not going to be a whole lot of new material there anyway, because we have been a pretty open book about it. I am very happy to talk about it a bit more today.
We would expect the spending review—and we are already planning for it—to be a continuation of some of the workstreams that we have been working on the MDP with. I have already been in contact with colleagues in the Cabinet Office and in Treasury to say, “This is where we are with the MDP. We think these are the questions that remain for us for the SR. Do you agree that that’s a good work programme for us to be able to chunk through over the next few”—
Q15 Chair: We know the process. Then you pitch straight into the SDSR? There could be a disconnect there.
Stephen Lovegrove: There could be. I have not heard definitively that there will be an SDSR. A five-year interval is common, but it has not always been like that. It may be that the Government of the day feel that actually, there has been enough in the SR to push it out a year. I just cannot help you on that, Chair, I am afraid.
Q16 Gareth Snell: Mr Lovegrove, you said that the MDP will align with the CSR and the likely SDSR. If we do not end up with an SDSR in 2020, how dependant on the MDP is getting this particular plan back into budgetary balancing?
Stephen Lovegrove: It is more reliant, at this point, on the SR next year. The Chancellor was very clear in the Budget when he said that “a comprehensive consideration of Defence spending” will occur next year in the spending review. We were very pleased to see the recognition that he made of the pressures on the Department this year at the Budget, but we would expect there to be the kind of discussion that you mentioned in the SR.
Q17 Gareth Snell: What has been the cause of delay in the MDP? We are running to a point where after the MDP has been announced to the House and by the time it is properly enacted, it could be almost immediately out of date once the CSR is announced.
Stephen Lovegrove: I confess I feel a bit frustrated with the sense that there are these snapshot moments where you fix a vision for defence and an appreciation of the threat that defence is trying to deal with, then you park it for a bit and then you come back to it. I am much more attracted, running the Department on a day-to-day basis, by a rather more iterative—not circular—spiral development of reviews. I actually do not mind that much that we have one review possibly running into another review with a slightly different focus, because that is really the way in which the world works.
Q18 Gareth Snell: You may not mind, but you have a Defence Equipment Plan for the next 10 years that has a £7-billion black hole in it, the majority of which will be accumulated over the next four years. In the longer-term plan, if the MDP, the CSR and the SDSR roll into one, where in that cycle of three potential spiralling reviews is the actual plan that means you fill that black hole, either by doing the deferring or deleting you mentioned, or by getting more money out of the Treasury?
Stephen Lovegrove: The Budget of a month ago has set us fair for ’19-’20—
Q19 Gareth Snell: Well, not quite, has it?
Stephen Lovegrove: It has preserved choice in a way that we would not have been able to preserve—
Q20 Gareth Snell: One of the problems with your Department, Mr Lovegrove, is that it constantly kicks the can of choice down the road for as long as it can, and therefore defers making big decisions about closing down, deleting or deferring. Simply prolonging that agony of choice does not mean that the equipment plan comes into balance, does it?
Stephen Lovegrove: It certainly does not come into balance as a result of the announcements at the Budget. The Budget was avowedly for one year only. I must say that, on a one-year basis, I would much prefer to preserve choice for a different tone of spending discussion with the Treasury and No. 10 in the SR.
I am expecting, in the SR, that we need to close with the position that you are highlighting, which is that—the NAO is very clear about this, and they are absolutely right—we have the biggest funding crunch in the three years post next year. If we do not, we will need to start taking some of the more difficult decisions, which were delayed as a result of Budget announcements.
Q21 Gareth Snell: My question is simple: when will the Department make a decision that starts to address the funding crunch that we all agree exists? To date, there is no timescale for a decision to be made; as we know, there is no timescale for the CSR to be actually delivered. When will your Department make a decision, or when do you expect Ministers to make a decision, on what will and will not happen?
Stephen Lovegrove: I expect the SR to occur next year. We have been told pretty much the same as you have: that it will happen roughly in the middle of next year. That is the moment at which we will be addressing the three-year period to follow, so that is the moment that I think you are looking at.
Q22 Gareth Snell: So if you are not making any decisions until after the CSR, what is the point of the MDP?
Stephen Lovegrove: As I say, there is a spiral and a continuum of analysis in this area that has to go on all the time. All countries do this; many actually have guiding documents that get filled in two years later, with an update a year after that.
Q23 Chair: But, Lieutenant-General Poffley, you said that you were already thinking about change of capability and that the Modernising Defence programme was very helpful in that process. Are you actually beginning to make decisions about stopping things, even if you are not willing or able to share them with us now, in line with what Mr Lovegrove has just outlined?
Lieutenant-General Sir Mark Poffley: As we go through our programme, in tackling the short term—particularly the early years—we will be drawing off some of the analysis that we have undertaken in the course of this.
Q24 Chair: Have you got anything in mind now? Even if you are not talking to us or talking in public, are you talking to commands and to people running particular projects about how those projects will be wound down and reduced and how the capability issues will be addressed? Are you having those capability discussions with the budget holders and the budget managers?
Lieutenant-General Sir Mark Poffley: We have those conversations routinely all the time. Inevitably, quite a lot of that discussion has been informed by the analysis that we have done to determine whether we have realistic costings and to get a proper sense of whether we can hone down on that. Where we think we can deliver more productivity, what is coming out of the efficiency work and the threat-based analysis that helps us in the prioritisation of—
Q25 Chair: But are you talking particularly to anyone about stopping any particular programme?
Lieutenant-General Sir Mark Poffley: We routinely talk with each of the frontline commands about the judgments of that type on an annual basis. That is a conversation that rolls right through the year, and it is conditioned by what we have been doing on MDP.
Stephen Lovegrove: Options are always being produced. There are lots and lots of options, but it is a question of where the decisions get to.
Q26 Chair: But stopping something wholesale is sometimes a very big decision, and the longer it goes on, as Mr Snell has highlighted, the more we dribble into the SDSR. These decisions and these costs are still going on for something that you might be considering stopping now.
Stephen Lovegrove: Mr Snell is absolutely right to say that you cannot keep pushing the can down the road, because that is very bad value for money. That is not what we want to do, but right now I am glad that we have the optionality to come to this in the SR.
Q27 Gareth Snell: Mr Lovegrove and Lieutenant-General Poffley, when we look at this plan again next year, as is the routine of this Committee, will you be able to sit in front of us and say, “Since last year, the MoD has determined”—through whichever ministerial decision—“to end this and stop doing that, and has brought at least the next three years of the plan into somewhere near balance”? Is that what you expect to be able to do in the next 12 months? Otherwise, we are not actually progressing in terms of the plan being affordable.
Cat Little: Could I have a go at answering that? We are right in the middle of the planning process for setting a budget from 1 April next year. The next equipment plan, EP19, will be for 1 April for the year that follows, so it is unlikely that the spending review will have concluded by the time we produce the next version of the equipment plan. If we produce it quicker than we did this year, they certainly will not be contemporaneous.
To go back to your question on when we make decisions, every single year we set a budget, make decisions and prioritise our funding to make sure that we can deliver the programme of record set out in the SR. Every five years, or whenever Government chooses, we then come back to look at the medium-term plan. This year, we have been able to secure enough funding through discussions at the autumn Budget to mean that, for ’18-’19 and ’19-’20, we do not believe that we have to make big capability decisions that impact on the Joint Force 2025 programme. As General Poffley says, though, we are constantly looking to make sure that any discretionary expenditure we can prioritise is focused on that programme of delivery.
Q28 Gareth Snell: The additional budget for this year does not come close to even making this year balance. There is still work to do there. I appreciate what you are saying, Ms Little. I think the subtext to what you are telling me is that, when we look at the Defence Equipment Plan 2019-29, the NAO is going to come back and say, “It’s still unaffordable,” albeit by potentially a slightly smaller number than it is this year. What I want to understand is at what point we will have a defence equipment plan in front of us that the NAO says is actually affordable, or where, at least within the four-year window that we actually look at, all the money that you need is there. At the moment, it is not.
Cat Little: It would be part of the spending review, which we would imagine would take effect from 1 April 2020. The equipment plan 2020, and the 10-year forecast after that, would be the next opportunity that we have to put this equipment plan back into balance, but even—
Q29 Chair: Back into balance? Are you pledging to do that?
Cat Little: That is the current process that Government has for multi-year spending reviews.
Q30 Chair: So it is your personal ambition to make sure that you are the finance director at the Ministry of Defence who gets an equipment plan out there that will be within budget.
Cat Little: That has to be our intention.
Q31 Gareth Snell: If that does not get you a damehood, nothing will. Last question from me: 2020 is fine, but what do you do in the interim because, as the NAO points out, the place where the equipment plan is most out of balance is the next four years? If you are saying that we will have two of those four years before you are in balance, what are you going to do in the next two years to make sure that you can afford the equipment that you are planning, but also that you are not now starting to buy equipment and build equipment that, after the CSR, you decide to decommission because of those large, longer term capability decisions, which you are, by your own admission, putting off until after the review?
Cat Little: In these first two financial periods, we are currently forecasting to balance our budget this year. You will know from the NAO Report that we over-allocated by £1.2 billion. We were facing a £1.3 billion forecast deficit. We have done that in two different ways. One, we set really tight budgets with our top-level budget holders, and we have held them to account. We have been much more robust in the way in which we performance-manage people to their forecasts.
We have also made some prioritisation decisions, and do you know what? Some of the things that we thought were going to happen have not happened. In any financial year, we are trying to get the balance of programming choices made as early as possible, and we are trying to make sure that our forecasts and our cost estimates are much more robust. This is the first year in many years where we have not had to make decisions in the middle of the financial period in order to bring the budget into balance, and I am very pleased to be able to say that we will bring ourselves in on budget this year.
Q32 Chair: That is good news, but it is quite shocking that it is good news. How much, approximately, did you save through the performance management of individual budget holders?
Cat Little: Quite a lot of what we are doing is through forecasting accuracy, rather than saying, “You can’t spend money.” We expect TLBs to prioritise their funding to deliver capability in the way in which we envisage.
Q33 Chair: How much approximately of that £1.3 billion?
Cat Little: Around £1 billion of our underlying financial position has come from better forecasting, better cost estimation, and much more realistic approaches to programmes.
Q34 Chair: So keeping your beady eye on people at an earlier stage, and them knowing that they have to plan properly, has saved £1 billion.
Cat Little: I think it is starting to have an impact, yes.
Chair: For the record, Lieutenant-General Poffley is nodding.
Stephen Lovegrove: Chair, may I make a point about bringing it into balance? I would not want to set expectations that we might come to regret, if we end up in a position where a 10-year programme is exactly the same as the funds that are available to finance it. Almost inevitably what will happen is we will have more funds than the programme. That is what has happened when that has been the case in the past.
While I do not feel at all comfortable with the over-programming position that we have at the moment—the £7 billion, most of it in the first four years—I suspect that we will always be running with what we would hope would be a prudent level of over-programming, because just by the nature of things, in a programme with over 1,000 projects all at very different levels of maturity, things slip. It is not right now, but I would not particularly like to have something that balances exactly in every year of a 10-year programme, because if we do not actually spend the money, which I suspect in most instances we might not, we would then lose it. That would not be good for defence.
Q35 Gareth Snell: Last question. When you say a “prudent level” of over-commitment, or insufficient funds, what do you consider—
Stephen Lovegrove: A lot less than what we are carrying at the moment.
Q36 Gareth Snell: Give me a number.
Stephen Lovegrove: It is difficult to be absolutely precise with that.
Q37 Gareth Snell: £100 million? £1 billion?
Stephen Lovegrove: Over a 10-year period, I think it will be quite a lot more than £100 million.
Q38 Gareth Snell: Less than £1 billion?
Stephen Lovegrove: I don’t know.
Chair: I hear what Mr Snell is driving at, but I think there is also a challenge about the risk profile of the programmes in there. We know that you are not going to give an exact figure, but percentage-wise in terms of the total budget?
Q39 Gareth Snell: You must have in your head a figure that you consider prudent.
Stephen Lovegrove: The figure that I have in my head, which I consider prudent, is certainly less than the figure we are running with at the moment. I would like to do the work with better information about what our budgets are and how the projects are developing—they are all at very different stages of maturity—and then get back to you. That is what we are doing. As Ms Little said, if our forecasting continues to improve at the rate at which it has improved over the last 18 months, that obviously squeezes the amount of over-programming that you would be prepared to deal with. If we find it difficult to get forecasting accelerating, inevitably we might run a bit hotter.
Q40 Gareth Snell: So taking away the number of what is prudent, when would you expect to be at that prudent point? Ms Little said 2020, so by 2020 would that prudent—
Stephen Lovegrove: I think so. You would want to see that number becoming smaller every year.
Gareth Snell: Yes, I think we all agree about that.
Chair: On that point, let’s pause and move to Mr Douglas Chapman.
Q41 Douglas Chapman: You mentioned the relationship between the MoD and the Treasury. The general public opinion is that there seems to be no love lost between the two Departments. Is that based on the fact that you persistently operate outwith your current budget, in terms of the potential for overspends? Am I missing something? What kind of pressure is put on by the Treasury to make sure you bring your future budgets in line?
Stephen Lovegrove: Ms Little will certainly want to come in on this. I would very much challenge the characterisation of the relationship with the Treasury. At official level, we work very, very closely with them. They are extremely good and valued colleagues.
Q42 Chair: We are glad about your relationship with the Treasury. It must make the begging bowl approach easier. Can you move on to answer the question?
Stephen Lovegrove: They understand the nature of the pressures we are under, and the Budget settlement of last year was a very clear recognition of that. They haven’t put any particular special and different controls on us because we are under some financial pressures at the moment. They expect me, as the accounting officer, to put those controls on the Department to make sure we don’t bust our parliamentary limits, which I know is the No. 1 responsibility that I have. I’m not sure I would necessarily agree with your characterisation.
Q43 Douglas Chapman: If I was at the Treasury and I had had at least two consecutive NAO Reports saying that your departmental plans are unaffordable, I would have some concerns about that. The other issue is, as Mr Snell pointed out, the amount of money that needs to be allocated within that first four-year period. We are going into a four-year period in which the variables are possibly going to be peaking all at the same time. We have got Brexit, which might have a huge detrimental effect on public finances. There is the issue of you choosing to purchase more equipment from suppliers outwith the UK, which may have an impact on the foreign exchange risks that you face. At the very time that you are saying that you can bring everything in on budget, you have got all these external factors that may give you real headaches and problems. How are you thinking about managing that process, given that you have got a four-year window to sort that?
Cat Little: Our job is to prepare a plan for a range of plausible and realistic scenarios. Therefore, we have given you what we think are the top end and bottom end of the scenario for the equipment plan. Of course, we do that for the whole of the MoD budget. What you have got here is a snapshot of the 40% that we spend on equipment. Our job, every single day, is to make sure that we are mitigating financial risk and that we are making decisions and managing to live within our means. I am confident that we can do that in the next few years.
Having said that, obviously there are shocks to the system. You mentioned foreign exchange. It is absolutely fair to say that the sorts of volatility that we are seeing in foreign exchange rates at the moment make it incredibly difficult for us to plan and mitigate those risks. Here, today, I have got 80% of my financial risk exposure for forex movement hedged. We try to mitigate it as much as we can. We have put aside what we think is a sensible contingency to manage anything that has not been hedged, but to be honest, if we continue at this sort of rate—today, the exchange rate for the dollar is 1.38, but we thought it was going to be 1.43—as we said in the equipment plan, it does not take a lot for us to be significantly over our estimates, and of course we haven’t got bottomless reserves to be able to buy that out. You are right to point it out, and there are risks that we are constantly having to talk to Treasury about.
Q44 Chair: I am going to turn to, I suppose, Lieutenant-General Poffley, but it might also be to Sir Simon Bollom. As Ms Little said, 40% of the Budget is on the equipment plan. How much flexibility is there elsewhere—perhaps this is Mr Lovegrove actually—to fill that gap in the equipment plan? What else could you not do? We know that there are recruitment challenges in the armed forces, so there is personnel, and there are always land issues, which we have discussed in other inquiries—we don’t have to go into the detail. Where would you see the best opportunity and flexibility to bail out the defence equipment plan, if it came to it?
Stephen Lovegrove: There is some flexibility to move resources from one part of the Department’s budgets to another, but it is far from unlimited. Everything has a consequence. The easiest thing to clamp down on, after you have clamped down on unnecessary movements, travel and those kinds of things, is training, actually, but that is something that people do with a great deal of reluctance, for very obvious reasons. We have some flexibility. We have central contingency, which we can place where we think it is needed most, but pretty much everything is under some degree of pressure, so in reality it is quite limited.
Lieutenant-General Sir Mark Poffley: I would endorse that. I think it is very limited in the short years because, inevitably, it is about the levels of commitment that we have already played into our capital expenditure programme. Your four main sources are obviously in the equipment and support arena, and that support budget is pretty much driven by activity, but there are some things that you can do in that space.
The second is obviously in the personnel area but, again, that comes with some real difficulties in the short term, and it requires some structural changes if you want to do it into the longer term. As we modernise the structure, we should be looking at more automation, which gives us some levers to play with.
You have also got an infrastructure programme and, of course, a raft of other sundry budget areas where you might be able to mine. But as the permanent secretary says, in the short term it is very limited because most of these require up-front investment in order to release some of that funding.
Q45 Chair: Sir Simon, from your perspective of DE&S—Defence Equipment and Support—what are the biggest risks in meeting Cat Little’s challenge to make sure that it is all on track for 2020?
Sir Simon Bollom: I suppose, to follow up on what has been said earlier about equipment and support, it shouldn’t be forgotten that nearly 50% of the EP is spent on equipment, support and sustainability—
Q46 Chair: What are the biggest risks, the biggest challenges, for you?
Sir Simon Bollom: Ideally, if you are putting in place a commercial arrangement with industry, to get best value from that you would want as long a sweep as you can get, to give predictability. That is a risk. It requires me and my team to front up with our industrial partners and ensure that we understand the cost base very clearly—what activity levels drive what costs and what opportunities we can exploit in order to meet the budgetary constraints. Having very clear relationships with industrial partners is vital, and the commercial arrangements that we put in place need to be flexible—not only because we need to meet budgetary impacts but because General Poffley has to have a flexible equipment programme to meet the threat. I need to be able to respond to that in an agile way.
Q47 Chair: We will move on to industrial relations issues later, but first may I press Mr Lovegrove on what he said about not having a fixed point in time? We appreciate that a lot of this is dynamic, but it could sound like getting off the hook. If it is a moving thing, is there any point in having a 10-year plan in the first place?
Stephen Lovegrove: Yes. I have to say that the discipline that has been brought into the programme since the 10-year plan was published in the last eight or nine years and the oversight that the NAO has brought to it have improved our appreciation of the levels of risk and have therefore improved the planning processes that we go through at every stage. I think it is absolutely imperative that we have a 10-year plan refreshed every year, accepting that it is a 10-year plan with some very dynamic and complicated components to it. I have no desire to move away from this at all; I think that would be a real mistake. It would make managing the Department difficult.
Q48 Chair: In a way, it is quite reassuring to hear you say that. I did wonder whether there was ever a fixed point on that dynamic moving spiral to get to Ms Little’s point of achievement from.
Stephen Lovegrove: It is a very fair point. The old cliché that if you cannot measure it you cannot manage it is true here, but we do need to recognise—
Chair: I am sure there is a joke in there somewhere about military defence’s past handling of finances—but anyway.
Stephen Lovegrove: Yes, I am sure there is.
Q49 Sir Geoffrey Clifton-Brown: General Poffley, how far does the plan include contingencies for a major deployment such as the Afghan campaign or the Iraq campaign? Clearly there is not only the cost of getting personnel and equipment into these campaigns, but the cost of replacing equipment that is lost. How far does the plan include that?
Lieutenant-General Sir Mark Poffley: Every equipment programme within the plan has provision for that level of attrition that you are describing, and it certainly makes assumptions about the relative deployment over a period of time of each of those equipments. It would be fair to say that the Modernising Defence programme has brought into stark relief the fact that this part of the programme needs to be given very clear attention. Recent exercises such as Exercise Trident Juncture—a NATO deployment into the high north—and the Saif Sareea deployment into Oman this summer have demonstrated that these things are vital. The thinking that comes out of those will refresh the provisioning factors that are applied to each of the support arrangements.
It would be a very brave person who said that they had got it absolutely right, because that assumes that you can predict future deployment activity, but it is an active ingredient of every single one of the programmes. I am confident that, given our scale of ambition at present, as articulated in the progress towards Joint Force 2025, we have attended to that.
Q50 Sir Geoffrey Clifton-Brown: Given the changing nature of threat in the world at the moment, which seems to be increasing, isn’t it essential that you have an SDSR in 2020? Otherwise, the thinking in the last one, which informs your current budget, will be way out of date.
Lieutenant-General Sir Mark Poffley: It is certainly the case, as we have discovered in the work that we have done this year, that there are certain areas of conflict that have accelerated way beyond what we assumed in 2015. That plays into the point about spiral analysis—that you constantly have to refresh things. It is fascinating that there are certain components of the 10-year plan that are pretty predictable, but there are some components in which the refresh rate—on technologies, for example—is accelerating well beyond what we had predicted even two or three years ago.
Where we are looking to become more tutored is in being able to accommodate those different profiles and postures and make sure that we provision in a sufficiently open-architecture way to accommodate those sorts of spiral development. In the IT world, for example, we are seeing a technological refresh rate that is exponentially different from what we had assumed 10 years ago. Those sorts of factors have fed into our thinking. That means that some parts of the programme will be relatively loose fit.
Q51 Sir Geoffrey Clifton-Brown: One of the big areas where you could save some money to fill the gap—maybe I can ask Mr Lovegrove this—would be to delay our Dreadnought and Astute programmes. Has any thought been given to that?
Stephen Lovegrove: No, there has not. In particular, a delay on the Dreadnought programme would mean that we would be placing in jeopardy our ability to maintain our primary operation—CASD. Quite the opposite; if anything, we would want to accelerate expenditure on Dreadnought. Indeed, that is the basis upon which some of the money that the Treasury has given us in the last year or so has been awarded. Likewise, the Astute programme is very important not only for protecting the deterrent, but for a whole host of other tasks, and we really want to make sure that those are delivered on time.
Q52 Douglas Chapman: Just before we move on, obviously a huge chunk of the money in the overall budget relates to the nuclear enterprise. To what extent does the nuclear enterprise actually make the overall plan unaffordable? If we were taking a different route, would that—
Cat Little: Since 2015, the nuclear enterprise has had cost growth of around £3 billion, so it contributes £3 billion out of the £7 billion affordability gap. It is also a very complex, big capital reinvestment programme over many years.
Q53 Douglas Chapman: What is that as a percentage?
Cat Little: It is around 40% of the overall programme, and it contributes to about 40% of the deficit. It is hyper-volatile, very complex, big levels of capitalisation, so you would expect it to be that way.
Stephen Lovegrove: The submarine programme as a category is twice as big as the next category. It is £44 billion of the £179 billion.
Q54 Douglas Chapman: We may come back to that. I was looking as well at the Modernising Defence programme that was suggested last January. We then expected it before the summer recess. We are still waiting for that to come out at the moment. I sense that there is a degree of frustration, because how on earth can professional civil servants make decisions based on a policy that is not there? How have your decisions, or lack of them, added risk to the value for money within the equipment plan in the longer term? By delaying these decisions, how does that work in the interests of the taxpayer in terms of you being able to spend money wisely?
Cat Little: Obviously, when we make any decision about the equipment plan we want to do it on a multi-year basis. First, it is obviously the right thing to do from a value-for-money perspective. Secondly, as Sir Simon mentioned, our industry partners are more likely to do a good deal with us if they can see the funding streams over a longer period of time.
It is incredibly challenging to get that balance right, but that is the nature of what we have to do. We have to balance short-term annuality—the need to live within our means—against making sure that we are making the very best value-for-money decisions. We do not always get it right, but that, in effect, is what we have to do within Government when there are constrained resources.
Q55 Douglas Chapman: Every time that a decision is either made or not made it has a huge impact on the industry partners that you are talking about. We have had in the last week or so Babcock closing down Appledore. We are sitting with a shipbuilding strategy that was approved by the Government only 12 months ago—maybe a bit longer than that.
By not making timely decisions in a sensible, logical progression of decision making, you are impacting on the ability of your industry’s suppliers to deliver what we need them to deliver. It is that complete mismatch between what is required in terms of capability, how the process works in terms of the procurement, and the lack of decision making at the highest level. Nothing about how the Department is currently operating seems to fit together to get the best value for the taxpayer.
Cat Little: Very briefly, I think the most important thing is that 95% of the equipment plan is funded, and we want to give as much certainty as possible. Going back to why the equipment plan being publicly and transparently available is so important, it is so that we can give as much certainty as we can. Of course, there is always going to be an element of uncertainty when you face a spending review, and when you have to look at the resource constraints you are facing.
Q56 Douglas Chapman: Sir Simon, do you have a view on that?
Sir Simon Bollom: In an ideal world, the greater the certainty and the easier it is, but don’t forget that our key suppliers have been working with us for many years, and they will absolutely understand the nature of the military threat and the affordability challenges. I think, coming back to the spiral idea, they are well attuned to the fact that they are maybe not going to get the longest sweep in terms of a hard commercial arrangement. We work closely with them to optimise that.
Q57 Douglas Chapman: But at the same time, people around the country are going to be losing their jobs because we cannot get a plan that makes any logical sense, in terms of the timing of various projects. From an outsider’s point of view, it all seems to be done in a way that is completely haphazard.
Chair: To be clear, Mr Chapman is not talking about—there is a policy element to this, potentially, but it is actually about how you at DE&S and the MoD generally manages the planning, so that we do not have a gap in service and therefore a loss of—
Sir Simon Bollom: I understand that, and you raise a good point about critical capabilities that exist in the UK sector. I can only really repeat that this is a constant dialogue. I am constantly in dialogue with my industrial partners.
Q58 Chair: You are in dialogue. What about your dialogue with the MoD?
Sir Simon Bollom: I would not say that it is on a daily basis; I would say an hourly basis, in that sense. I like to think that Mr Lovegrove, Ms Little and the general here absolutely understand where we have critical pinch points in industry. Sometimes it is not always the military capability that drives it; it will be the industrial imperative as well, and we have to make those difficult choices.
Lieutenant-General Sir Mark Poffley: My organisation is charged with delivering two things in this part of the debate. The first is the retention of operational advantage: we must recognise the imperative of industry to have a full order book, but by the same token, my job is to make sure that we send people to war with the right equipment and the right preparation. That said, given the transparent nature of how we are now talking to industry—in a way that we were not five years ago, frankly—we are having an open conversation about what we think the nature of conflict is going to look like into the future, and they can therefore adjust their provision to us in a sensible way.
The second component that we are charged with delivering is sovereign choice. That means that, wherever possible, I do not want to be beholden to single suppliers, or at least where I am, I am absolutely cognisant that we must make provision for that, so we retain the sovereign advantage that I spoke about earlier. That is important, because it may be that certain skill sets in the portfolio of the industry genuinely require support from the state, rather than being able to survive on their basis. However, I have to tell you that it is a very, very small community.
Stephen Lovegrove: The issue that Mr Chapman raises is a very real one, and I think that we, along with the whole Government, recognise that managing our strategic suppliers better has to be a priority. One of the key strands in the Modernising Defence programme—because there were only four—was strategic supplier management, and we have been working very closely with the Cabinet Office to put a degree of order and predictability around that. I hope that over a period of time that will go some way towards allaying some of the fears that you have.
From our perspective, we need to make sure that we are behaving as a demanding but sympathetic client to these very important British companies and the people who work for them. A rather more holistic approach to it, and to each of the strategic suppliers, has been rather overdue, but all of us at this table and elsewhere are working hard at that.
Q59 Chair: Have you ever made a decision for industry to keep that capability going as a priority of operation?
Lieutenant-General Sir Mark Poffley: We have. It tends to be in very niche, specialised capabilities at the higher end of classification, so we tend not to advertise them greatly.
Q60 Chair: I am going to bring in Ms Little very briefly, because we are aware of the time.
Cat Little: You would expect me to say this, but not at any cost. We would always do that as long as it offered value for money overall. It is a really difficult trade-off between—
Chair: I have to say that you are talking to a bunch of MPs, and some of us have industry in our constituencies. There is actually more sympathy than you might realise toward ensuring that our industries are able to deliver—not at any cost—as one of the considerations, as Mr Chapman has highlighted.
Q61 Gareth Snell: You mentioned the Single Source Regulations Office. When the Committee looked at it, one of our recommendations was that unless the Ministry of Defence joined up its plans to ensure that there were longer term interests for R&D funding, the Single Source Regulations Office would have a greater role than competition and choice in determining what you can buy, which I think was accepted by the MoD at the time.
My question is about skills. If we are not keeping certain industries going, such as shipyards, we lose jobs and the skillset as well. We then become beholden to the Americans. If we do not get this right, aren’t we just outsourcing procurement to the Pentagon? All of sudden, the Americans would become the only game in town in terms of providing stuff.
Lieutenant-General Sir Mark Poffley: First, I do not think that they are the only game in town, but your underlying point is absolutely right. Part of the preservation of sovereign choice is to make sure that we have choice in the future, which requires us to maintain certain skills in our industrial base.
Stephen Lovegrove: Last Friday I was at Warton, where the Typhoons are made and the latest ideas for the future of combat air are being developed by BAE. Much of the discussion I had with the management that day was about how we can ensure that those very rare and very sophisticated skills in the development of fighter aircraft are maintained, so that we actually have optionality around that. If we are unthinking about it, we might lose it.
Q62 Douglas Chapman: How confident are you that the £1.3 billion affordability gap in 2018-19 can be managed successfully without any detrimental effect on capability?
Lieutenant-General Sir Mark Poffley: We work hard to make sure that we do as much as we can to avoid that. It would be wrong to say to you that I can guarantee that that will not roll out, but we do have choices in managing it. We can look at the notion of forecasting, which I think Ms Little mentioned earlier. How accurate are the costings that we have got? We have seen our improving incrementally in that regard over the course of this year, and certainly our ambition is for that to continue.
There is certainly work underway to look at the support arrangements and the efficiencies that are associated with those programmes. There is negotiation to be had with industry to see whether we can amortise some of the costs associated with the programme over a different set of years. The notion of annuality, which we are regularly encumbered with, is now a more proactive conversation as we take forward our strategic supply and management arrangements.
I am confident that we can make real headroom with regard to that £1.3 billion. I am afraid that I cannot give you an assurance that there will never be a detrimental effect to any piece of capability, but we will do our level best to ensure that there is not.
Q63 Douglas Chapman: Some of the decision making might have a detrimental impact by increasing costs in the longer run—maybe think about the work that needs to be done on the Type 23s, some of which are presumably reaching the end of their normal lifespan. The Committee has already published a report on the cannibalisation of ships, for example. I am sure that if it is happening in the Navy, it is happening elsewhere across other services. Are these not an indicator that the money is not being well spent because of a lack of decision making at a high level?
Lieutenant-General Sir Mark Poffley: Intuitively, you would expect that if you are going to defer a decision, there is a fair chance that some of it will be value-destructive. One needs to be careful, because some of these areas are so fast-moving. You talk about the Type 23, but part of the shipbuilding strategy work—indeed, I am chairing a meeting tomorrow on precisely this—is to work out the additional costs of continuing to run a platform like that, which is a legacy capability, in the form we have got in the programme or not. Therefore, there is a constant conversation, which includes an assessment of how value-destructive a deferral or a delay would be. Of course, they are taken on a case-by-case basis. In some cases, we are accelerating the out of service of some programmes to avoid that sort of effect manifesting itself.
Q64 Douglas Chapman: But there was a NATO exercise a few months ago, and the Royal Navy could not supply any ships to take part in it.
Lieutenant-General Sir Mark Poffley: The demand signal on the Royal Navy is acute. That is a known fact.
Q65 Douglas Chapman: That comes back to capability, if you will forgive me. It should be a bit of a flag-up if we cannot send one ship to take part in a NATO exercise off our coast. It wasn’t as if it was in another part of the world. It wasn’t in the Mediterranean or the Black sea. It was off our coast, yet we couldn’t supply one ship. That is a real concern.
Lieutenant-General Sir Mark Poffley: Without really understanding the particular task you are referring to, it would be wrong to say that at any point in recent history we have not been able to deploy significant components of the fleet. There are choices about which deployments you send them on, and it may well be that the tasks associated with the fleet on that particular period meant that it was not a priority for us in the Royal Navy. I have explained that part of what we are looking to do to counter the threat, particularly in the sub-surface arena, has put pressure on the fleet, but we have to prioritise those tasks. As Mr Lovegrove has already pointed out, some of those tasks are a higher priority than others. I suspect that there was a judgment at play about which one you were going to do, but that would be the case no matter how large the fleet was.
Q66 Chair: I want to go back to you, Ms Little, and your projected position on the 10-year plan. How much of that will rely on deletions of projects? You have got to live within your means but, to push you and Mr Lovegrove, do you think there will be things that we have to stop doing to meet the plan? I know that there are lots of ifs and buts, but can we afford to keep doing what we are doing?
Cat Little: There is always a combination of things that we have to do. We talk about the three Ds—deletion, de-scoping and deferral. As Mr Lovegrove said, our preference is to stop doing things or not start. Quite a lot of what we do is looking at our uncommitted expenditure, and where we have got discretion we choose not to start things. It is inevitable that you are going to have to do a balance of all those things to bring the programme into balance if the funding isn’t provided.
Q67 Chair: You are trying to project a position over a decade, in financial terms, or five years in the short term, and then every year. Are you hampered by the fact that you have to balance the budget every year and you can’t carry over in a way that might be possible in other organisations?
Cat Little: Yes, very simply. As much as I greatly respect the need to annually live within our means and comply with the vote of parliamentary supply, at the end of the day such a large part of our programme is capital-intensive and hugely volatile. It is highly unusual in this type of business not to be able to move funds between years to manage that level of volatility. It is inevitable that you are constantly trading off short-term versus long-term decision making.
Q68 Chair: Which brings me back to the point about a 10-year programme. Mr Lovegrove, you said it is important to have it to keep your nose to the grindstone and make sure you are within budget, but you have got the annual budget planning. We look at all these things. I have gone through it before. There is Modernising Defence, which is less about the money, the spending review, the SDSR, annual budgets and 10-year plans. You have got this mishmash of timescales and budgets. In an ideal world, do you want to see a change to how that works? What would be your ideal world?
Stephen Lovegrove: In an ideal world, we would have a smoother rhythm of planning exercises than we have at the moment but, you know, we don’t live in an ideal world, and the job for me and the team is to make sure that, if we do occasionally have jarring exercises that we need to manage for, they are co-ordinated and made to make sense across the whole. That is a lot of what we do.
Q69 Chair: What about head room, Ms Little? The removal of headroom gives you less scope for manoeuvre. How is that going to affect your ability to balance the budget? How are you managing that?
Cat Little: Sorry, to make sure I understand, when you talk about head room—
Chair: I imagine your programme commitments have no headroom in the plan, have they?
Cat Little: No. We do have some contingency but it is by far not enough to manage the level of financial risk or funding gap that we have got. Ideally, we would have some contingency to help manage that movement between years in the absence of funding flexibility. There are programmes across Government where that sort of flexibility is permitted—there are not that many, but big, complex mega-projects I think benefit from having that level of flexibility. I think we have a number that would fit with an argument with Treasury that that sort of funding flexibility—
Q70 Chair: So are you arguing with Treasury about this?
Cat Little: We are not arguing. We have set out—
Chair: So, putting your case to Treasury.
Cat Little: We have absolutely set out a case for our nuclear programmes, in particular.
Q71 Chair: How are those conversations going?
Cat Little: They are ongoing.
Q72 Chair: So we are looking at spending review decision time.
Cat Little: It is highly likely that that sort of multi-year big matériel decision can only be looked at in a spending review.
Chair: Okay. We’ll wait until spring, summer or whenever next year.
Q73 Sir Geoffrey Clifton-Brown: If you are budgeting on these plans, how close are your budgeted costs to the actual delivery costs?
Cat Little: There is a whole range. We have about 2,000 project lines that we monitor. Some are fairly close and some are significantly adrift. The standards that we put in place are that within six months we expect all forecasts to be within 1%, and we monitor that on a monthly basis. We talk to programme teams about why their variances are out. Obviously, at the end of the day, it depends on why. Some things are out of people’s control—it might be a supplier not being able to deliver something—it might be a programme team mis-estimating when something might be done and, sometimes, it might be our costing and estimates that are out, but we try to get it within 1% six months away from a forecast.
Q74 Sir Geoffrey Clifton-Brown: How close are you to meeting that 1%, do you think?
Cat Little: Obviously, we are required to live within 1%. Treasury sets us quite stringent rules every single year. This year, I expect us to be within 1%, as we were last year.
Q75 Chair: I wanted to come on to radar—I don’t know if any of you are expert on radar. We have had some evidence from Unite the Union about the Government’s plans to invest in radar. BAE Systems has invested about £5 million so far. The Government were being asked to invest £10 million over four years, which will be matched by BAE Systems. At the moment, the Government are not minded to invest—this is their words—although we understand that they are committed to “a long-term review” of radar. So there is a long-term review of radar—I assume that is correct, Mr Lovegrove.
Stephen Lovegrove: No, I was assuring you who isn’t an expert on radar—that’s me.
Chair: Okay, you are stepping back. Does that mean, Lieutenant-General Poffley, you have to step forward on this?
Lieutenant-General Sir Mark Poffley: Simon Bollom will make one commentary, then perhaps I will add a bit of flavour from the capability point of view.
Sir Simon Bollom: Radar is one of those high-end areas where we have got to be very careful in terms of making sure that we get the funding flow through to those capabilities to match our sovereignty requirements. With complex radar—which I think you are referring to, in the context of BAE Systems—there are a number of capabilities in the UK that provide that. We are in dialogue in BAE Systems at the moment. I am not aware that anybody has said no to anything, but you have put your finger on one of those particular areas where in fact I have a number of conversations this week—it probably would not be appropriate to go into them right now, around the table—to talk about what is on offer and what could be done. In that one I will be working very closely with General Poffley. We must make sure that we do not step off or step past the point of no return unconsciously.
Q76 Chair: How aware are you of the workforce profile of those working in radar, particularly at Cowes and Great Baddow?
Sir Simon Bollom: I could not give you the workforce profile.
Q77 Chair: But are you having those sorts of conversations within your systems?
Sir Simon Bollom: Absolutely. I am having one this week in fact.
Q78 Chair: So you are aware that the union says that over a third of the engineers at the sites of Cowes and Great Baddow are within five years of retirement?
Sir Simon Bollom: The engineers?
Chair: Yes, the engineers.
Sir Simon Bollom: The engineering demographic is a generic problem in this country in all engineering sectors. The demographic is—
Q79 Chair: We know that that is an issue. Is it helping to shape your thinking on how we deal with radar?
Sir Simon Bollom: It certainly is. The Cowes facility that you referred to is actually quite a small facility that delivers some important capability in support of the Type 45 frigate, for example. We now need to take the long-term view of how we sustain the in-service capability and how we provide the technology that we are going to need in future to make that capability.
Q80 Chair: It is not just how though, is it? The timings matter. A delay of several months in a Government review can have a very big knock-on impact. I am just using that as an example.
Sir Simon Bollom: It is a very good example in my view. We will come to a view. As I said, I will talk to General Poffley about the capability needed and to Ms Little, who is the guardian of the purse here. We will make whatever decisions are appropriate to retain the capability that we need.
Lieutenant-General Sir Mark Poffley: I would add only a little. First, this is a real area in which operational advantage really plays. It is also an area where there is some very high-end science, which is not unique to the United Kingdom, incidentally and, alternatively, nor is it unique to the United States, just to provide some reassurance.
Gareth Snell: Noted.
Lieutenant-General Sir Mark Poffley: There are some genuine capability benefits inside British industry, and we are looking to make sure that we maximise those.
It is fascinating sitting where we are. We get visibility of most industrial suppliers’ ambitions in this space. Of course, not all of those suppliers talk to one another because they want to preserve their commercial and competitive position. One of the things that we are doing is distilling down who has actually got capability worth retaining. Where they have not, what can we do to improve it and to provide greater choice for us going forward while retaining that operational advantage? Some of those technologies are really cutting edge, and certainly DSTL—our science and technology folk—are very closely engaged with a number of countries and a number of companies, to make sure that we maximise the benefit of this.
When it comes to preserving skills, there is definitely an agenda here—as in many other places—for which we are going to have to look collectively at how we take this sort of technology forward and preserve the choice of British companies inside that portfolio. That is across all environments; it is not just in the air sector but applies equally elsewhere.
Q81 Chair: I will ask you, Mr Lovegrove, but do pass the question along if it is not for you. The technology for radar has obviously got a very definite military application, but there can be other applications of some of our cutting-edge technology and science in industries that are predominantly defence. Do you look across Government and talk to other Departments about industrial strategy and support? I know that there is a strand of this for which you do, but can you explain to us how you do that, to make sure that if you withdraw a bit, it is not going to completely lose that capability or indeed vice versa, that other bits of Government do not withdraw their support or procurement from certain types of industry in order to preserve some of that capability for the MoD?
Stephen Lovegrove: We do. Should we do more of it? Personally, I think that we should. The industrial strategy policies that the Government have at the moment provide us with a forum and a framework for doing that. As you know, we have a nuclear strand, a shipbuilding strand and an aerospace strand, which we are standing up at the moment. I have recently written to my counterparts in six other Departments about the aerospace strand, to tell them what we are doing and how they need to play into it, and to provide points of contact so that we can make sure that we take on board their important interests in it. I think it is probably more effective at the very big sector strategies. I think it is probably more effective at the shipbuilding level—at the aerospace level—than at the level possibly of something that is a little more niche but very important, like radar. I am happy to take that away and see whether we can improve at that level.
Chair: That is very helpful. I feel a recommendation may be coming on.
Q82 Gareth Snell: Briefly, Sir Simon and Mr Lovegrove, I do not disagree with anything you have said, but where I think there is a glaring omission, and it goes back to the very earliest questions we asked, is that it is all well and good having a defence air strategy, a defence maritime strategy and a defence industrial strategy, but until the Department actually makes some decisions about what platforms it wants and what those platforms will be used for, all this stuff is just paperwork on a desk—it doesn’t lead to anything. How are you ensuring that the preparatory works you are doing through these industrial strategies will link up with the decisions you plan to make in 2020 about the platforms you wish to have? Otherwise, we could have the situation, as Lieutenant-General Poffley pointed out, of equipment that we have paid a lot of money for not being deployed, to save costs. For instance, we could see £3 billion-worth of aircraft carrier not being deployed, at a cost of possibly £1 million a day—I was told.
Chair: We were told in Rosyth.
Gareth Snell: It seems to me that the one thing your Department has to do is to decide what platforms it wants, and then all these strategies will work, in place, but until you get to that point, having other Departments ready to feed into a strategy without knowing what you are building and buying is all a bit woolly.
Stephen Lovegrove: To take the future combat air strategy as an example, right now, given the absolute centrality of that to everything the country is trying to do in defence, even though we are not 100% sure exactly how that will play out, we would still be investing comparatively small amounts of money at this stage—in the next couple of years—to ensure that we had done the preparatory thinking. We would not want to lose two years of thinking time, planning time and discussion time and of building international alliances. All those things would enable resource decisions to be taken at a much higher level of materiality in a couple of years’ time. These are very long-term programmes.
Q83 Gareth Snell: But those alliances are different. I know we are going to get on to the F-35s later. Whether we decide to buy As or Bs has a huge impact on the cost of that long-term programme. It has a huge impact on whether they become an RAF or a naval asset. It has a huge impact on which British companies are building what, because the As are not built in the same way as the Bs, and it has a huge impact on our tier 2 status later on down the supply chain. All those decisions need to be taken now, because a lot of other stuff isn’t going to work out otherwise.
Stephen Lovegrove: They don’t need to be taken now, with respect. We know that the first batch of 48, which we are on contract for and are committed to, will all be Bs.
Q84 Gareth Snell: And the other 90?
Stephen Lovegrove: That is a decision—
Q85 Gareth Snell: That hasn’t been taken.
Stephen Lovegrove: That has not been taken, but does it need to be taken now? No, it doesn’t. I am not sure exactly when you would say that it needs to be taken.
Lieutenant-General Sir Mark Poffley: In terms of preserving certainly British industry’s equities in that, the difference between an A and B is not necessarily material to the production line in the UK.
Chair: We had a briefing on this. We can’t talk about everything.
Q86 Gareth Snell: We build the Bs, don’t we?
Lieutenant-General Sir Mark Poffley: We build parts of Bs.
Q87 Gareth Snell: So if we suddenly start ordering lots more As than Bs, and the demand for Bs goes down—
Chair: Sorry, anyone watching this will think you are all doing the “Sesame Street” alphabet, if you are not careful.
Gareth Snell: Who is the Count? That is the question, isn’t it?
Q88 Chair: Can you explain what you mean by the As and the Bs, just to be clear, for anyone listening?
Gareth Snell: F-35 type A or type B. The As do the conventional landing and the Bs do the horizontal landing and are used for the carriers. If we decide to upscale A and downscale B, or we decide not to do B, and therefore the demand for Bs goes down, there is an impact on British industry. There is also an impact on the Navy versus the RAF, which is a different competition and one that you have to referee internally. But all these decisions have long-term consequential knock-on effects.
Q89 Chair: Do you agree with Mr Snell on the impact on industry of the change in balance?
Lieutenant-General Sir Mark Poffley: I think the change in balance is an interesting one for British industry. British industry’s equities are in the entire order book of those aircraft across the world, it has a 15% share of every aircraft that is built. Where the issue for us will become pertinent is the point at which we are running two fleets. That will be an issue because quite clearly you have different support arrangements for two fleets rather than one. Secondly, the procurement costs of an A is cheaper, item for item, than of a B, because it is a less complicated aircraft.
There are some issues there, but there is a question whether that is necessarily going to manifest itself on British industry—on our choice. If the international partners that are currently buying the F-35 change their order book by volume—and, indeed, by type, but not necessarily for the UK on the A/B conversation—that is quite clearly going to have an impact on all of the partners.
Q90 Gareth Snell: We are not doing the F-35. My point is that there are certain decisions that need to be made within your Department that have a longer-term impact. On the As and the Bs, putting aside the planes themselves, whether that then becomes a naval or an air force asset, or what the support arrangements are, that has a longer-term impact on your equipment plan. You cannot answer or determine what that will be, because you do not know what you are going to be supporting.
That is where I think there is a mismatch in this whole conversation. You have plans for how you want to hedge money and do various things, but until the Department decides what platforms it wants and how many of them it wants, a lot of this is very academic.
Lieutenant-General Sir Mark Poffley: I take the point that beyond 2024—beyond the first 48 being delivered, which are all going to be Bs for the avoidance of any doubt—there is a question. I acknowledge that at the point at which you make a decision on the variant types—incidentally, I think it would be very odd if we only stayed at 48 B models, but let’s wait until we have done the analysis and confirmed our—
Q91 Gareth Snell: Odd, but not impossible.
Lieutenant-General Sir Mark Poffley: Pretty remote, I would suggest. Then there is a question for us quite clearly about the support arrangements associated with running two fleets. I acknowledge that.
Sir Simon Bollom: Just on the A/B and the impact on UK industry and the evidence that we gave a couple of weeks ago, we are in for approximately 15% of the overall workshare. That is on an offtake of something in the order of 3,000 aircraft. What proportion of As and Bs the UK takes has little material difference. You will probably know that the main industrial activity associated with the production is up at Samlesbury in terms of aircraft build. That factory delivers the back-end of all the F-35s.
Q92 Douglas Chapman: As General Poffley suggests, there is an ongoing debate. I am just looking at a note here from Deborah Haynes, who was given a quote that if the F-35 “can’t fly from an aircraft carrier it shouldn’t be purchased”. I think that may be coming from an unofficial RAF source. Nevertheless, it points to how we come to a decision about capability. If there is already indecision within the services, that again is a concern.
Moving on to another part of the NAO Report, which we are here to discuss today, it says: “The 2018 Plan includes £21.2 billion of less mature cost forecasts.” When do we reach the point when we will know that that is sufficient, or whether we actually need a bigger budget to carry forward some of these projects?
Cat Little: That is just a feature of different programmes and different stages of the maturity. You will always get that sort of blend in a programme of this size. The £20-odd billion that is referred to tends to be the programmes that are managed directly by our top-level budgets. They are not yet into a delivery agent. They are currently maturing what they need, when they need it, and going through a costing process. All of them will be tracked and they will mature over time.
Q93 Douglas Chapman: General Poffley, what are the main programmes that have immature costings at the moment that we should be concerned about?
Lieutenant-General Sir Mark Poffley: Costings are maturing—whether they are immature is a relative judgment, of course—inevitably as we use new equipment. We have just had a very successful deployment of the carrier across to the east coast of the United States. In sailing her, we have learned awful lot about her. In flying the F-35s off her, we have learned an awful lot, as have our American counterparts. As the Americans fly our F-35 variant, they are similarly learning some very important lessons for the support and maintenance of those sorts of platforms.
With any big programme where you have got new technology being introduced, which inevitably comes with some proving requirements, there is of course a level of immaturity around the costings. If you take any of our big programmes, until they have been run out for a few years, there is always going to be some uncertainty as to whether the assumptions on which you have made those costings will be borne out. My clear view is that some of the work we now do in our concept and assessment phases for new programmes puts reliability and support costs firmly and with a high profile into the costing work that is being done. Have we got that right yet? Absolutely not. There is more work to be done, and that goes to the heart of these forecast costs issues that Ms Little described earlier.
Q94 Chair: Ms Little, how do you assure yourself about the assessment of reliability? That is pretty big.
Cat Little: There is a variety of assurance processes. The main one is our independent costing service, where we select a range of programmes over a three to five-year-period and we get what we call independent realistic outturn costs.
Q95 Chair: When you say “independent”, is that independent of the MoD or the original programme director?
Cat Little: They sit under the DE&S at the moment, and we are bringing them in to the head office, because they provide a service for the whole of defence. They operate under ISO 9000 policy standards. They are externally assessed every single year to ensure they meet those independent costing policy standards and they have a steering group that I chair and which has representatives from across the Department to ensure that we are able to see their working to assess it.
It is quite a specialist thing, costing some of the things we produce. We actually work with colleagues around the world in the Five Eyes to compare and contrast our costing approaches on a regular basis. That is our main source of it, but at the investment approvals committee, which I chair, we also look at a range of costing methodologies. We will look at what we call the probability 50 and 90 levels. We will take a judgment as to whether we think that brings the right level of risk, maturity and assumptions as part of the approval process.
Q96 Chair: If you are looking at aircraft reliability, there is therefore a knock-on potential cost with maintenance. Can you give us some more human-terms examples of what you might be assuring yourself of that Lieutenant-General Poffley or Simon Bollom’s team have dealt with?
Cat Little: With something like the Type 31, the £1.5 billion that we have included within the equipment plan has a corresponding service line within the Navy Command budget. We are constantly looking at whether the costs for support and sustainment are matching the useful economic life of the capital investment that we are spending money on.
Q97 Chair: So you are looking at their existing expenditure and extrapolating what future costs might be from that.
Cat Little: Yes. We look at the whole-life cost. We look at the CADMID cycle—concept, assessment, design, manufacture, in-service and disposal. Every single one of those phases is costed and assessed whenever we make an investment approval decision.
Q98 Douglas Chapman: On the situation with the Type 31s, that was an announcement that was made, but there was nothing in last year’s accounts to make an allowance for that. Is there anything in the current plan looking forward that would come as a surprise as work that is being done where there is not a budget line for it?
Cat Little: No. The NAO has looked at the completeness of our plan. You are right: last year we were out of sync in the timing of the decision about the Type 31. It is now fully included within the plan. I think that the equipment plan is complete.
Q99 Chair: Ms Little, you have talked quite a bit about skills. Earlier you mentioned the skills sets that you need. Do you think that you have yet got the skills sets in the Department that you need to manage the efficiency and outturn of the plan effectively?
Cat Little: I think this is a really important area of focus for us. I think it is fair to say that the whole cross-Government finance profession is facing gaps and different skill sets. We need to evolve. We work across the whole of Government.
Q100 Chair: So is the answer not yet?
Cat Little: Not yet but we have plans, as you would expect. We have a financial management improvement plan; we have a functional plan for the 3,000 finance professionals who sit in the Ministry of Defence; we have new investment in IT, and we work across Government to try to recruit and retain talent.
Q101 Chair: This is all good stuff, but I have been on this Committee since 2011; Sir Geoffrey was originally on this Committee 20 years ago. We have both seen a lot of promises about improving capability. In the last seven years that I have been on the Committee, what has been the barrier to getting these skills in place?
Cat Little: I would argue that there have been quite a lot of changes. Just this year alone we have recruited six new finance directors.
Q102 Chair: I don’t doubt that we have seen a trajectory, but how long will it take to have the right support?
Cat Little: Last year I set out to our independent audit committee a plan that will evolve over the next five years. We would expect to see significant improvements in the next three. I would like to see assurance levels across everything we do in financial management improve to a much higher level in five.
Q103 Chair: Sir Simon, you’re in the hot seat. DE&S has its ups and downs. Do you have the skills you need? You are bringing a lot more people in now.
Sir Simon Bollom: I would never be satisfied with the skill levels we have. There is always more to do. You will know that for four years we have been undergoing a comprehensive reskilling of the workforce. In terms of efficiencies that we have delivered, our programme adherence is showing some encouraging signs.
Q104 Chair: Are you able to hold on to them? You are having to compete with industry.
Sir Simon Bollom: That is absolutely the point: you upskill people and they become desirable. We have to make sure it is a full package—it is about attraction, training and retention. I would add two other key areas to Ms Little’s finance function: commercial project controls and project management. That is where in DE&S we have invested significantly in upskilling the workforce in our programme management, putting in place modern systems that can accurately track these large programmes.
Q105 Gareth Snell: Whenever someone says “significant”, I always like to try to quantify what that means. What does a significant level of improved skills mean in tangible, quantifiable terms?
Cat Little: The measures we have put in place are partly about our external assurance. We use NAO assurance on our financial statements every year. At the moment, I would like the number of adjustments, mistakes and errors reported in our accounts brought down. We have measures about the number of qualified people in the Department. At the moment it is around 41%; we would like it to be much higher. I can go through pretty much every single bit of our—
Q106 Gareth Snell: Give me a couple of examples so we can get a flavour.
Cat Little: They are just a couple. Our forecasting accuracy needs—
Q107 Gareth Snell: You say from 41% to much higher—what does much higher than 41% look like?
Cat Little: Sixty per cent. is our current target. We try to use smart metrics wherever we can, but we also rely on the internal audit function, which gives us external independent assurance of our financial management. At the moment we have some gaps. I would like our internal auditor to tell us that we have significant assurance across the piece.
Stephen Lovegrove: That, it has to be said, is not solely the case with finance. We have a transformation theme going on in the Department as well, underneath our chief operating officer. He is recruiting very heavily to get properly qualified people to help him do that, and likewise in the commercial strand. On any number of fronts there is a functional up-gunning. Sometimes I do not approve as much as they would like, because we do not have the money to be able to do it, but that is the nature of it.
Q108 Chair: That is an issue we take up across Government. We share some of those concerns. Sir Simon, what are the main programmes in the plan where you think you have been over-optimistic on costs?
Sir Simon Bollom: The main programmes in terms of over-optimism on cost—
Q109 Chair: Perhaps you have not been over-optimistic, but you have not achieved the cost savings that you had hoped. Either or both of those will do for starters.
Sir Simon Bollom: I like to think that we now have a very much more mature costing system and costing regime. It has already been mentioned that we are held to task very significantly by our own internal CAAS cost review team. The NAO highlighted this year that there is a discrepancy of somewhere of the order of £3 billion between our costings and those that the CAAS team forecast. That gap is narrowing, and I think that is evidence that we are getting better at the job across the portfolio. We have a very useful internal challenge function. Generally, we cost in a bottom-up way, and the CAAS team may use some parametric approaches. Importantly, that forces us to look very carefully at the risks inside the programme.
Q110 Chair: Will they ever align?
Sir Simon Bollom: To be honest, if they are ever aligned, it almost defeats the object of having challenge. As I say, we have a very healthy challenge function, which, if there is a discrepancy on a large programme, causes my teams to look at the reason for that discrepancy.
Q111 Chair: Can you give us an example of when it has not aligned and your team has gone back to find something that they could have taken out the first time around?
Sir Simon Bollom: The early days of the F-35 programme are a very good example. We had very extensive dialogue on a programme where there was a large amount of uncertainty. As it happens, cost adherence on the purchase of the aircraft has been pretty much exactly as predicted by—
Q112 Chair: Just to be clear, did the CAAS system predict a different cost, and did that make you change? Can you just talk us through what you did?
Sir Simon Bollom: On that example, clearly the US manage that programme and to some extent we are a price taker. They produced a prediction of what the unit price would be over the duration of the programme, and the cost assurance team were very challenging on that—challenging in a way that allowed us to go back to the US and say, “Look, there are some risks that we don’t think”—
Q113 Chair: When you say “allowed us to go back”, do you mean they had good data? What was it that helped you in negotiations with the US?
Sir Simon Bollom: In those early days—this is just part of a spectrum—it is the parametric model. They take a wide range of platforms throughout the world, they get open-source data—they have the data we have, for example, on Typhoon—and they make certain predictions about what cost outturns would be, normally speaking. That really forces us to justify the bottom-up costs that go into the programme. I have to say that that process was particularly healthy because they were able to flag up a number of areas where there did not seem to be the right evidence, which enabled us to go back into the US programme, challenge industry and get those risks out. That was a very constructive and healthy interface between us and an independent cost assurer. As a result, that programme is running ahead of schedule in terms of cost.
Q114 Gareth Snell: Sir Simon, what you have said has been almost entirely couched in hyperbole and clichés. You say “extensive”, “very challenging” and “large amounts”. I want to understand how you quantify and ensure that what you say is very challenging is very challenging, and that what you say is a large amount is a large amount. The metrics for this all seem to be very much wet finger in the air—if it is good, it is very good; and if it is not good, it is okay. We seem to lack the ability to put our finger on a number and say, “That is the target to which you have to work up or down.” I get that some of this stuff is fluid. Do you have another example that gives a more concrete demonstration of your team going in, seeing something and taking certain actions that have led to an outcome?
Sir Simon Bollom: Probably the best example is a recent one: the Poseidon P-8 aircraft. We got an initial set of costings from the US Navy and the CAAS team were able to do their own independent cost estimate of that platform. That was a particularly good example where they identified a number of efficiencies that the US Navy could deliver, not just across our aircraft fleet but across the whole production run. As a result, we have made a very significant efficiency saving, in excess of £200 million.
Q115 Gareth Snell: When your team goes in, do they have a figure in mind? Is the baseline to take something open-source and model it up?
Sir Simon Bollom: That is a good example. It is a 737 aircraft, so you can get some open-source costings for the air vehicle, and we know what systems are fitted into it, so you can do some parametric comparisons of what a radar would cost to integrate. You build up, parametrically, what we would call a “should cost” model. Depending where we are on that, we would use that to challenge an industry bid and enter a negotiation.
Q116 Gareth Snell: So you basically take the sum of the parts and work out the sum of the whole—
Sir Simon Bollom: It is not quite as simple as that.
Chair: We did ask Sir Simon to put it in simple terms to understand, to be fair.
Q117 Gareth Snell: And then you go back with that figure and say, “Could it be more this than that?”
Sir Simon Bollom: Yes, we call it a “should cost” figure.
Q118 Douglas Chapman: We have talked quite a bit about the expenditure end of the budget and the equipment plan, but I want to ask a few questions about the savings that were also part of the plan. Your budget assumes securing a residual £6.1 billion of efficiencies. Are you confident of delivering that, or is the delivery of that programme a bit of a pipe dream?
Cat Little: May I start? I am sure others will want to add to this. Of the £6.1 billion remaining, we have disclosed that we have included £2.2 billion from further work that we have done with DE&S and that we are confident that we will have plans in place to deliver. That was out of a £4.1 billion pool; we were not confident to include the whole £4.1 billion. Looking back at some of the lessons of the past and at the SR15, it was clear that we banked large efficiencies, partly to pay for investments, not all of which had been fully assured—
Q119 Chair: You made the numbers balance, even if they did not really balance.
Cat Little: I wasn’t there at the time, but it is clear to me—
Q120 Chair: I am simply summarising what I think you are saying.
Cat Little: I think there are some numbers in there that I would have preferred to have greater assurance over. What we have done is to take an assured approach to the numbers that we are and are not willing to bank. We do have a gap, so there is still £3.9 billion remaining. We have recently started a transformation programme, which the permanent secretary alluded to earlier, looking at a number of cross-cutting options across defence to find further savings.
It is clear to us that unless we change the way we do things, we will not be able to sustainably reduce the cost base. Gone are the days when you could just take out cuts. What we really need to do is transform the way of doing business or make things much more digital, much more productive and more efficient. Delivering further savings off the back of that will need investment and time. That work is being geared up so that we can present it as part of the spending review next year.
Q121 Douglas Chapman: Recommendation 3 in our Report stated: “The Department should demonstrate to the Committee at the earliest opportunity that actual savings are being achieved.” I do not expect a commitment on that right here and right now, but if we are looking at a report this time next year, what information can you provide that will reassure us that the work you have said you are undertaking will actually be delivered?
Cat Little: By the next time we come in front of you, there will be a much more mature assessment of efficiencies and we will be able to say much more about confidence levels.
Q122 Douglas Chapman: Part of the savings that I have noticed coming through are through the single source contract regulations. I believe that the Department has pooled all the DE&S efficiency targets relating to the equipment plan, which presumably means that we cannot look at individual savings that have been made. How do we get to a point where we can track the savings on an individual basis, so we can see where the savings are being made, what is working and what is not as efficient as we thought it might be, so we can make a judgment on where savings can be made in the future?
Cat Little: We pooled them because there were a range of different legacy targets over many spending reviews, and we found that we were comparing and contrasting apples and pears. This year, we have brought in an independent assessor to look at every single line, confidence levels, the evidence behind delivery of savings and how confident we are that we can do more. Just because we are not desegregating the single source savings, that does not mean that we cannot track everything that we are committing to and banking on within our financial plan.
Q123 Douglas Chapman: Would you look at having that kind of discussion with the NAO for next year’s Report as well? We are trying to track the public pound and how it has been spent or saved, or what efficiencies the Government have been making.
Cat Little: I entirely agree.
Douglas Chapman: This is a plea from the Committee to say that we need a bit more transparency around these issues, however difficult they may be.
Chair: Is “I entirely agree” your whole answer?
Cat Little: I entirely agree with the NAO’s recommendations, which are that we need much more transparency and detail. The work is under way and I fully expect for us to be able to say more. Of course, some of that will depend on the timing of the spending review, but our intention is to have much more about confidence levels, more transparency and more detail in the report.
Q124 Chair: Will the transparency include commentary? When we looked at the whole of Government accounts, we said that it was not just about the numbers. The numbers matter, but for the average citizen and taxpayer, it is quite helpful to have a commentary. Are you planning to explain more as well?
Cat Little: Yes.
Q125 Chair: On the F-35s, is there anything that you will be able to report to Parliament about the programme as it unrolls—as we order them down—and about the costs?
Lieutenant-General Sir Mark Poffley: You had a pretty in-depth session, hopefully, on the F-35s—
Q126 Chair: That was in private. That is fine—we do not mind having the odd private session—but we are the Public Accounts Committee so we are also keen to hear some of those things in public, too, or to see what it is possible to say in public.
Lieutenant-General Sir Mark Poffley: The time when we would confidently be able to make a judgment about the programme in the longer term is a little way off. Therefore—
Q127 Chair: Can you give us an idea?
Lieutenant-General Sir Mark Poffley: We are going to bring the initial operating capability to the Air Force as a land-based platform this December. We will then have a series of exercises where they will re-embark on to HMS Queen Elizabeth. Then she will conduct her first operational deployment in 2021. Until we have gone through that cycle, I suspect it will be very difficult to project accurately quite what that is going to look like. By about that stage, we will probably be in a position where we will have a better understanding of the global support package, in particular, and how multinational partners are feeding into that—
Q128 Chair: And, conceivably, whether you reduce the number of Bs for As. Can we be clear? You were fairly clear about ruling that out earlier.
Lieutenant-General Sir Mark Poffley: Right. I am absolutely clear that we have no plans—indeed, no plans—and no one has submitted to me an alternative plan, so I am interested to hear this media speculation. It will not be the first time I have heard media speculation about—
Q129 Chair: It was not just the media. Deborah Haynes is on the button, I think.
Lieutenant-General Sir Mark Poffley: I recognise it is good sport to try to send a wedge between the services on that. What I would say is—
Gareth Snell: They are good at that themselves.
Lieutenant-General Sir Mark Poffley: Arguably. I am a soldier, you will notice; we never do that. On the first point, the reality is that I do not think you will have data that will stand up to any scrutiny this side of 2021. Secondly, on the variant type, I do not anticipate a decision on the variant type this side of 2021 either, frankly, because you simply do not have the experience to judge.
Q130 Chair: One of the other aspects of this—as we learnt in our briefing; it is not a secret—is that if any country withdraws, the unit cost potentially goes up. The US has said that it will not supply Turkey’s share if Turkey takes on the S-400 surface-to-air missile. Presumably, you are aware of that. Have you done any analysis of what the impact would be on the UK’s costs?
Stephen Lovegrove: At the moment, we are in negotiation with the joint projects office on the next series of buys. Inevitably, that sort of factor will play into that negotiation. Until you get a judgment on every other international partner’s ambitions and whether there has been some modification of those, no one will be in a position to make a judgment as to the UK share of that impact. Frankly, we have not got to that stage in the negotiation.
Q131 Chair: When you have nailed down the price on the next tranche, can you keep to that price?
Lieutenant-General Sir Mark Poffley: Once we have negotiated the price—it is a fixed price—we are locked into that and the offtake schedule.
Q132 Gareth Snell: That is a fixed price per lot, isn’t it?
Lieutenant-General Sir Mark Poffley: It is indeed.
Q133 Chair: Per aircraft, for that lot.
Going back to some of the points that Douglas Chapman was raising to you Mr Bollom, the £2.2 billion of savings that you have banked—
Sir Simon Bollom: £4.2 billion.
Q134 Chair: The £2.2 billion is already taken. You haven’t hit the £4.2 billion. I am talking about the ones that are banked as certain. How have you calculated them? Are you confident that they will be achieved?
Sir Simon Bollom: Let me make sure I zoom in on the right numbers. I am looking at figure 9—the efficiencies confident in achieving column—and it is £4.2 billion. On top of that, I am anticipating that we will be able to deliver in the order of another £2 billion.
Q135 Chair: How confident are you that you can deliver?
Sir Simon Bollom: We have, I think, quite a rigorous system, and generally we do not log an efficiency until we have a contract quality proposal. That allows you to be very clear about the outturn cost.
Q136 Chair: Can you give us some real examples of what type of efficiencies you are securing? Obviously, you have to meet Ms Little’s threshold now as well. Fierce Ms Little is on your back.
Sir Simon Bollom: She is very exacting about the evidence I have to provide.
Q137 Chair: Can you share with us what sorts of things you have to do to satisfy Ms Little?
Sir Simon Bollom: I will have to put together a business case submission that will demonstrate the current cost if it is a support arrangement. A good example is probably one of the biggest efficiency programmes: the Titan programme on Typhoon. We took about £500 million out of that support programme.
Q138 Chair: What was the price of doing that for the Typhoon? Did it descope?
Sir Simon Bollom: Not at all. This was a joint challenge. It is a single source arrangement with BAE Systems. We had an anticipated cost profile based on the contracts that we had in place. There are a number of contractors involved in it, and it took two years, in the end, to go through the costs root and branch, to look at how we could incentivise industry. That is the key point. It is not a cost-cutting exercise. We look for a mutually agreeable solution that gives good business to industry, delivers capability to the general and delivers financial benefit to the MoD. That contract was just over £2 billion, in the end.
In terms of how we verify those costs, I have an existing baseline and a profile as part of the contract. It is not quite as simple as taking one away from the other—
Q139 Chair: Was this looking at productivity margins, cheaper parts—how did you go about it?
Sir Simon Bollom: All of the above. Rationalising facilities, getting quicker turnaround times on spares and getting engineering capability at the front line to reduce the number of components that come off the aircraft. The mantra is that every spare is a cost, not an opportunity. Critically, it is about having an incentivised deal with industry. In this case, it will be a target cost incentive fee, so you have a target cost, and if it goes above that target cost, they go into pain share, and if it goes below that target cost you are in a gain share arrangement. These things take a long time, but that is probably one of the better examples I have.
Q140 Sir Geoffrey Clifton-Brown: Before I ask my final question, a lot of this work with your suppliers is developmental, inevitably, by its nature. How often do you negotiate intellectual property agreements with your suppliers?
Sir Simon Bollom: That is a fundamental issue that you have to negotiate at the front end of any contract. Clearly, if it is a new platform there will be an intellectual property negotiation at the front end and then, when you get into the in-service phase, pretty much every contract break represents an opportunity to have discussions about not only intellectual property, but the whole terms and conditions of any future commercial arrangement.
Q141 Sir Geoffrey Clifton-Brown: That didn’t quite answer the question, though, did it? It told me what you were thinking about.
Sir Simon Bollom: I’m sorry. That wasn’t my intention.
Q142 Sir Geoffrey Clifton-Brown: It tells us what you are thinking about. How often do you actually do it, and how much money do you make out of intellectual property each year?
Sir Simon Bollom: I could not put a number on—
Q143 Sir Geoffrey Clifton-Brown: Can you write to us about that?
Sir Simon Bollom: Can I manage expectations? I don’t think I could put a number on intellectual property.
Q144 Sir Geoffrey Clifton-Brown: That tends to imply to me, Sir Simon, that you are not actually thinking about it in the way you should.
Sir Simon Bollom: Okay.
Chair: I should point you to a previous report we have done on intellectual property, or which touched on it.
Q145 Sir Geoffrey Clifton-Brown: Mr Lovegrove, can you let this Committee have a note on what you have done in terms of intellectual property?
Stephen Lovegrove: With pleasure.
Cat Little: I should probably add that the Defence Science and Technology Laboratory has the highest amount of IP activity on behalf of MoD, and we have recently worked across Government as part of the balance sheet review with Treasury on looking at how we assess and monetise IP. We are very happy to write to you on that. It is something we do every day.
Q146 Sir Geoffrey Clifton-Brown: Thank you very much. Mr Lovegrove, the FT had a report in September that you wanted to set up your cyber-warfare unit but you were wrangling over costs. Has that been resolved?
Stephen Lovegrove: We have big ambitions for our offensive cyber-capabilities. Part of the agreement at the Budget was to ensure that some of the money that the Treasury allowed us to have extra would go against that particular line. We have a set of agreements in place with GCHQ, which allow us to know how we would like to develop it. In terms of specifically how we are going to spend the money and exactly what the money is, we are really waiting for the next budgetary round, which is effectively starting around now. In large part, for the next year, we are in reasonable shape. Again, it is one of those things that, for the longer term, will be quite a big part of the spending review discussion.
Q147 Sir Geoffrey Clifton-Brown: It seems to me that it is quite an urgent requirement.
Stephen Lovegrove: It is.
Q148 Sir Geoffrey Clifton-Brown: To be waiting on the next budgetary round seems to be a very unsatisfactory situation.
Stephen Lovegrove: We have a lot of money that we spend every year through the National Offensive Cyber Programme. It was £160 million; I think it may be dropping to £140 million. We are going to top that up with some of the money that we got from the Treasury at Budget time. If we were to snap our fingers and that money was not near £200 million, but £1 billion, we would not be able to spend that amount of money in the first year. We have sufficient money to get that kind of capability off the blocks and continue to develop it. In the longer term, we will want to make sure we have got enough money in the budget to be able to grow it. It will grow quite a lot more, I hope, than what we have at the moment.
Q149 Chair: So a major part of the spending review.
Stephen Lovegrove: Yes. You should not worry about the fact that it is underfunded or unfunded. In fact, for the next two years, we are putting significant resource into it. We are very, very clear that it is an important part of our capability suite.
Q150 Sir Geoffrey Clifton-Brown: The FT indicated that you are looking at about 2,000 personnel. Is that the sort of thing we are talking about?
Stephen Lovegrove: We are looking over a period of time to have a multiple of the number of people who are doing it at the moment. There are limits to how much I can say in open forum about this, as you will understand, but it is certainly a very considerable increase.
Q151 Chair: And a huge issue for skills.
Stephen Lovegrove: A huge issue for skills, because the kinds of skills in question here are very rare.
Chair: And highly marketable.
Stephen Lovegrove: Highly marketable.
Q152 Chair: Will you be seeking permission to increase salaries for some of the senior people in this area?
Stephen Lovegrove: The whole employment proposition will be an intensive area of discussion for the next six months, and it will not just be about pay; it will be about terms and conditions, and to what extent these people are part of the military machine. It is quite a profound set of discussions.
Chair: We touched on some of this when we were up in Rosyth, those of us who had that opportunity.
Q153 Douglas Chapman: This is the final question. The £14.8 billion, in terms of your own figures that you have produced for potential overruns in budgets—
Stephen Lovegrove: The top end.
Douglas Chapman: Yes. I am trying to think of MOD contracts and various pieces of equipment that have actually been under budget over a long period of time; maybe you know better. The NAO also say that some of the analysis on your part remains optimistic. The forecast cost could potentially be higher, so at this stage, what is the worst-case scenario? Would you anticipate £14.8 billion being a reasonable figure to associate yourselves with, or could you see a scenario where it goes beyond that £14.8 billion?
Cat Little: There is definitely a scenario where it could go beyond £14.8 billion. Our job is to make sure that the scenarios are plausible and realistic, and that they are based on some sort of evidence, but it is fair to say that I have more confidence in our short-term forecasting than our longer-term forecasting. Some of the less mature costs in the five to 10-year period could be materially wrong. We do everything we can to make sure that they are not, but that is just the nature of forecasting.
We have a range of different maturity levels within the equipment programme, as we discussed earlier. However, we tend to find that our historic analysis shows that we are actually far too optimistic about how much money we can spend. Quite often, we cannot get the contracts on order, or we cannot get suppliers to deliver as quickly as we would like. We tend to find that that is the problem we face, rather than over-optimism in cost.
Chair: Thank you very much indeed for your time. The transcript will be up on the website in the next couple of days—uncorrected, as ever. Our report will not be out until the new year, but we thank you very much for your time. I am sure we will be seeing each other again all too soon. Thank you very much indeed.