Q31 Chair: I accept that might well be the case, but that is their lot. They are a private company; if they miscalculated in estimating what they charged Government, fine, but they should not then pick up extra money by charging more for the fourth boat at £1.28 billion.
Bernard Gray: We had a contract for three boats, which was placed after a competition in 1996/1997. For a variety of reasons that we can go into, that has cost both them and, to an extent, us, a considerable amount of money to put right. When, a decade later, they come to negotiate further boats, they are not going to make the same mistake they made last time of significantly under-costing the issue. We cannot force them by saying, "You made this mistake of charging too little the last time we had a contract with you, now you must charge us too little again". They are going to come to the table with what they believe to be a realistic price to do that job, and that is what has been in negotiation.
Q32 Chair: The question I am asking is: have you screwed them down hard enough? It is such a difference: £2.23 billion for the first three and £1.28 billion for one. It strikes me that they are picking up the underpayment on the first three in the charge on the fourth. It does not seem to me appropriate for the taxpayer to pay that bill.
Bernard Gray: That is not the case. As part of the sole source negotiations we have significant access to all of their hourly rates, amounts of work put into it, the cost of the Government furnished equipment and of the components, including the steel and so on and so forth, and we get to audit their overheads. That Astute number represents the real cost of and maintaining building that boat. One of the problems we have with it is we are building boats more slowly than we were intending to 10 years ago, so the overhead of maintaining the Barrow shipyard falls across a much lower level of overall work, increasing the individual unit prices of the boat as well.
Q33 Chair: Can I ask you a question around that? Sorry to interrupt. You got £1.9 billion extra cost of delay; did you figure into that any additional costs that arise out of deliberately choosing to slow down the rate at which we are building boats? I am now being told that is reflected in the £1.28 billion. Did you deliberately reflect that in, or is that on top of, the £1.28 billion?
Ross Campbell: It is in the costs of delay3, Chair.
Q34 Chair: That is in the £1.9 billion?
Ross Campbell: Yes.
Amyas Morse: If it takes longer-
Q35 Chair: I understand of course it takes longer, but in this much higher figure for the fourth one, are we double counting?
Bernard Gray: No. In agreement with the numbers, we have more overheads in this because we are building boats more slowly, as well as the technical cost of building this boat turning out to be more expensive than the company originally estimated. That has cost them hundreds of millions.
Q36 Chair: You have delayed contracting 5, 6, 7, haven't you?
Bernard Gray: Yes. Some of those are in process, but they have been delayed from previous plans.
Q37 Chair: For the record, the £1.9 billion extra historical cost that has arisen out of delays to date represents more than the cost of this expensive £1.28 billion. If we had done them all on time, we could have got another submarine out of it. That is one way of looking at it.
Bernard Gray: It is a way of looking at it, but the reality of the situation is a mixture of technical reasons-where it would not have been possible to do that work in that time, because the company had underestimated the complexity of what they were doing, and we had lost some skills-Departmental cash flow assumptions around the middle of the decade, and the decisions around the availability date of the successor deterrent. All of those add up to increase that cost in a way that says: if all of those things had not happened, you might have been able to buy an additional boat. Whether you would have or not, bearing in mind what the requirement of the Navy is, and the costs of running a boat, is another question.
Q38 Chair: What happens if the next CSR does not give you the additional uplift you want?
Bernard Gray: We have a planning assumption we are told to work to by the Treasury.
Ursula Brennan: Yes.
Q39 Chair: Given where we are now and what the Chancellor has said yesterday in the House, would think it highly unlikely you are going to get an increase in your CSR settlement. One of the things I am trying to tease out of you this afternoon is that all sorts of assumptions in the SDSR and forward planning were on the basis of a more generous settlement in 2014/15. There is a big question mark; I think anybody in their right mind would agree with that. Therefore, what happens to this sort of a programme, were that to happen?
Bernard Gray: If we wish to deliver continuous at-sea deterrents as a nation, we have to have a successor deterrent boat on station in 2028. Therefore, we do not have any further slack in this programme in order to be able to reduce the levels of activity through that yard.
Q40 Chair: This is one of your top priorities.
Ursula Brennan: It is, yes, absolutely.
__________________________________________________________________________________
3 £1.28 Billion is the Approved Cost for Boat 4, which does not include the cost of deferral. The actual forecast costs reported in the MPR11 (NAO VFM report) including the deferral costs, are £1.40Billion.