Q51 Chair: I am going to keep saying it: "back into balance" on an assumption that I think will be overturned fairly quickly. If we look at the Specialist Vehicles, which I assume is your ground stuff, you are putting £1.4 billion into the prototypes.
Bernard Gray: Development4.
Q52 Chair: The development stuff. You have so far not committed to buying anything beyond that. My recollection from when we looked at armoured vehicles is over the next 10 years you will have £5.5 billion to spend in that programme. If there is any future pressure from, let us say, a change in your planning assumption, that could easily go, because of the basis, which you have talked about, that they are easier things to cut because the contractual commitment is less. We will have wasted again, potentially, £1.4 billion developing a Specialist Vehicle. Am I right?
Bernard Gray: There are a set of assumptions contained in that. If we should work to a different planning assumption that says we should plan to spend less, then we will have to make a set of decisions to cut further. However, it must be the case that if we were over programme before, reducing to something close to the planning total we have been given now is at least travel in the right direction. Exactly where one chooses to land that programme, should we be cancelling things today and paying termination costs today, when we do not know that we are going to have to terminate those contracts? If it turned out that we got the money we had been expecting to get, then we would have paid termination costs unnecessarily.
Q53 Chair: I bet you your predecessors said exactly the same thing around armoured vehicles, when they put the money into the development cost of the FRES, or whatever the hell it was, which ended up being development money invested without any vehicles on the ground. My concern is £1.4 Billion is a heck of a large development cost against a pretty small budget of £5.5 billion, which is probably one of your more fragile budget heads should there be any changes in the planning assumption.
Ursula Brennan: There is one difference in terms of your suggestion that this is no doubt what we used to say in the past; I understand your point that our planning assumption may be wrong, but we are at least planning the budget against a planning assumption. We are no longer planning against a budget that is overheated, which is different from where we have been in the past.
Bernard Gray: It is not clear to me what one should do with that assumption. Are you saying to me that I should cancel the Scout programme tomorrow?
Q54 Chair: All I am saying is it is a slight feeling of plus ca change when I look at it. If I look at the armoured vehicles, where we have recently had an inquiry, it is not a lot of money. There is a history there of cutting the contracts, because they are easy to cut. I am taking a common sense view on the economy as a whole, and therefore the likely impact on your defence budget. I then come to look at this and think it is a lot of money to put into developing a new so-called Specialist Vehicle. I think it is in danger of being money wasted; that is what it looks like to me. However, I am not you, and I do not know what these toys do across the piece.
Q55 Matthew Hancock: Could I ask the same question in a different way? Nobody knows what the policy decision over the Defence settlement will be, but there is a set of planning assumptions. You are working to those planning assumption; of course, you need to work to planning assumptions, everybody assumes that. Are you also looking at contingencies for a different planning assumption in either direction?
Vice Admiral Lambert: When we look at what we take forward and how we put the programme together, it is always a mix between capability, priorities, and pragmatism. It has to be: as CDM pointed out, when things are on contract it is quite difficult to get out of it. We are trying to go far more to batch systems, buying off the shelf, because if the policy does change it gives us the ability to change direction and go for something else. That change does not happen overnight, but where we can we will go for batches and buying batches, so we can then stop where we were going, and go in a different direction.
Bernard Gray: To have some greater flexibility inside of this, and to be inside a planning total, is a more comfortable place than either outside or on it, but we are on a journey. There has been very significant progress made. Is it all done yet? No. There will then be an argument about, if one was sitting inside a planning total, what is a reasonable contingency, against either technical problems or a set of budget assumptions someone might have to make. To say that we are heading in a direction to get to a more conservative place around what we plan to buy cannot be a bad thing. Bearing in mind the amount of equipment that is already programmed in, you cannot get there overnight. So we are heading in the right direction. We must agree with the general principle that says we should be planning prudently around all of this, and we are working as fast and as hard as we can to get there.
Q56 Austin Mitchell: I want to move onto Nimrod, which is something of an enigma to me. The project was approved at £2.8 billion; it was eventually over budget by £789 million. The Report says that some of this was due to "the design challenge being hugely underestimated by industry". Why was that? I thought it was a development of an existing Nimrod, which was rather old, but still serviceable, just like me.
Vice Admiral Lambert: The Nimrod MRA4 was a very different aeroplane.
Q57 Austin Mitchell: Was it totally new?
Vice Admiral Lambert: It took the original Nimrod airframe, it took the wings off, it stripped it down, it added new wings, a new combat system, new flight control systems etc. It used the basic framework of the old Nimrod, but to all intents and purposes it was a new aeroplane. It was procured back in the 1990s following a competition, and this was, at that time, valued as best value for money.
Q58 Austin Mitchell: The Report also says that these design challenges were "compounded by a weak programme management culture, which lacked transparency, neglected or overrode project control systems and disciplines, and produced forecasts that Tacked depth and reality'." Why was that? That was the Department's responsibility.
Vice Admiral Lambert: CDM has done an awful lot improving the project management side of it. It is probably more appropriate you talk about the project management.
Bernard Gray: There are two sets of project management, one by the Ministry of Defence, and the other by the company. Both would be found wanting, and part of the reason for having to change the way that we do business is to get a better grip around these things. Part of the problem with this in contractual terms at the time-ironically Astute and Nimrod were let within 12 months of one another in the mid to late 1990s-was we ran a competition with a fixed price contract, and the company after that said, "We do not have to tell you anything about what we are doing, because we have a contract to deliver this thing". It took quite a long time to penetrate through a wall of, "We do not have to tell you what we are doing", until they got into some significant difficulties with both programmes, by about 2002/2003, before the Ministry of Defence could get in behind it. From a technical point of view, running a competition with a fixed price, unlike the current situation in submarines, you do not have as much visibility of the ability of the contractor to deliver.
They are people like everybody else, so they have an "I am sure it is all right" optimism bias, some level of denial. It took them and the Ministry of Defence some time to break through that. By the time that had happened in 2002/2003, all of the problems were entrenched. It is then a matter of how you sort those out from a problem that has already been created over the previous half dozen years.
Q59 Austin Mitchell: The final renegotiation-of which there were three-was October 2003. It was not cancelled until October 2010. What was the reason for that long delay?
Bernard Gray: A decision was made in 2003 that it was better to continue than to stop, because the capability was wanted, and it was felt the programme could be fixed. A decision was made at that time, which, with the benefit of hindsight, was not a good one, to continue to put money into it.
Q60 Chair: Except there is a real capability gap now, isn't there?
Vice Admiral Lambert: If we had money we would have carried on with Nimrod.
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4 The £1.4Bn costs reported against Specialist Vehicle includes: the development costs and prototypes for Recce Block 1 and the common base platform for all other roles (£500M on contract); long lead production items for RBI (circa £500M, not yet on contract); and training system development and project support costs. All costs include vat @20% and forecast inflation adjustments.