Q71 Matthew Hancock: When did you become the SRO for that capability?
Commodore Beverstock: Technically, January this year.
Q72 Matthew Hancock: We have heard about the history of why there have been overspends and delay in this area. We have heard quite a critical description. As the SRO can you give the description of why you thought that these delays happened, and whether you are content with the decisions that were taken as a consequence?
Commodore Beverstock: Which delays?
Q73 Matthew Hancock: We have a constant frustration on this Committee that SROs are in place for a short period of time, and here we have it: you are an SRO, through no fault of your own, who is in charge of a non-project.
Commodore Beverstock: Perhaps if I answer that question dealing with the Astute programme, because that is where the bulk of my experience lies. Then I can translate that into the Nimrod programme on its own.
We had this big gap between the Vanguard class and the Astute class. What we saw at the beginning of the programme was an underestimation of the cost; as you have heard CDM articulate, that underestimation and the way we did the contracting made it very difficult to get under the skin of that particular programme. In my previous jobs I have lived through and seen the results of that. In the early part of the programme we lacked the ability to put the submarine together technically; these are very complex pieces of equipment to construct and bring together. It is not just what BAE Systems do; it is the other two tier-1 suppliers, plus the 400-odd second and third tier suppliers, which have to contribute to that critical supplier base: the SQEP-suitably qualified and experienced people-that you need to manage the project, build the submarines and supply the equipment. It was not just BAE Systems, it was all the way through the supplier base, that we had problems, because we had effectively stopped ordering submarines, and stopped building them. What we saw in the early part of the programme was that led to the consequent delays in the project, and the cost increases. There is no doubt that that was a consequence of that.
As the programme moved through, and as we started to treat the production enterprise as a whole enterprise, tied in with the Successor, we have got to the bottom of those technical issues. What we have seen for the Astute programme is a much better delivery performance. HMS Astute has now passed its initial handover, it has yet to achieve its operational handover, but it is now out in America. It very successfully fired two Tomahawk missiles, including the most updated Tomahawk, only last month. When we re-basedlined the programme 18 months ago, that was when we expected to deliver. That is a very good delivery performance, and we are on track to deliver that submarine to the Navy when we were predicting it is going to come in to the Navy.
Q74 Matthew Hancock: When is that?
Commodore Beverstock: That is in the early part of 2013. That is reflected in the Report. In the early part of the programme we saw these unbounded cost risks, cost increases and cost delays. We then treated the submarine enterprise and did some deliberate delays in stretching out the drumbeat to match with the Successor programme, again trying to deliver the minimum sustainable net cost for the submarine enterprise. That has been characterised by better cost performance. CDM has outlined that the cost forecasts and the historical cost analysis we have now got in the Astute programme is better than we have had in the past, and we have certainly got evidence of that through this particular Report.
That hopefully that answers your question, certainly on the Astute programme. When I look at the Nimrod programme, all the characteristics of that enterprise- the delays and everything-are all there. Even though we cancelled the programme, although we had 95% paid out what was approved on the programme, there were still issues to be resolved with delivering that aircraft into service. Those costs and risks were not quantified.
Q75 Chair: Let us stick to the Nimrod/Astute. You said 95%. My reading of this is that you spent £3.4 billion; we ditched £3.4 billion. There was £200 million left to spend to get them into service. I hear now that you say there were some risks with that figure, but that was £200 million. You have cancellation costs; you are obviously not going to tell me what they are today, although I would love to have a ballpark figure between what you are offering and what they are asking. Do you feel able to give us that figure?
Ursula Brennan: We are happy to give you a confidential briefing on this subject.
Bernard Gray: It has been subject to negotiation between us and the company, but I would not want to say it in public.
Q76 Chair: It is pretty difficult to think it would be much below the £200 million left. Therefore it seems to me that the only value for money justification for cancelling Nimrod was the £1.8 billion5 that you save in running costs. Nowhere in this Report does it tell me what the alternative running costs are of all the mitigation strategies and mitigation equipment that you are putting in place. There is a £200 million figure; some, if not all, is going to be eaten up in cancellation costs-you will tell us in a confidential briefing. There is a £1.8 billion figure of running costs, some of which must be eaten up in mitigation, and there is a capability gap. It does not seem to be a great story. Of the £1.8 billion, do we know how much is going to be eaten up in mitigation expenditure?
Bernard Gray: It is a similar to your point about Scout. You are always trying to make probabilistic decisions about what you need and can afford to buy, own, and operate. As Admiral Lambert said, if we had more money, we would buy it. We do not have more money, and the money is less than people had been predicting in the past. It is a lower priority than some other things. Why is it a lower priority? Because we have a layered antisubmarine warfare defensive network; we do not depend on one thing for one job; we have layers of it.
In removing a layer, does a probability go up that a submarine might penetrate a shield? Yes, it does, but we have calculated that, against the real cost of completing it-which may well have been significantly in excess of £200 million to bring it into service, plus, as you say, the almost £2 billion in the 10 years to run it-we made the judgement that said the additional assurance we got from fielding that was not justified by the costs that would be incurred.
Amyas Morse: Can I just help, Chair? To draw this out a bit, if you are making good the fact that that capability is not there, you are probably going to be working other assets harder, or there will be an opportunity cost to it. In other words, if you had had that asset there, you would have used the rest of your capabilities differently. That must be true, mustn't it? Therefore, even though it is not possible to quantify it-we said we did not see how we possibly could- we thought in principle there must be some costs associated. Instead of having Nimrod, let's say you have your antisubmarine helicopters in the air much more, doing submarine patrols in a more active capacity than you might have done otherwise. There are costs. I am not surprised that we could not arrive at what they were, but it is not a zero-sum game in terms of the additional operating costs, I wouldn't have thought. Is that fair?
Vice Admiral Lambert: There may well be marginal costs of keeping certain things at sea or running them slightly harder.
Chair: What are they?
Q77 Matthew Hancock: In your last answer to me, you said the future costs of completing the programme were unquantifiable because of the overruns and the technical problems that you had come up against. Are you really telling us there were unquantifiable future costs of completing the programme, and unquantifiable costs at the margin of mitigating the risks, and you did not manage to quantify or even get a risk-based analysis of this? You are shaking your head, Mr Gray?
Amyas Morse: Forgive me for a second. I am not surprised that it is difficult to quantify the additional operating costs of using other equipment, because it can be used in so many different configurations. It is quite difficult to say what assumptions you would make.
Bernard Gray: What proportion of the fixed costs do you associate with that?
Amyas Morse: While there is something there, I am not expressing personal surprise that they do not know what it is.
Q78 Chair: I disagree with the Comptroller and Auditor General. In taking a decision to junk £3.4 billion of expenditure, which is the decision you took, you have to do a proper cost benefit analysis, which tells you what your extra costs would be elsewhere.
Commodore Beverstock: I joined as SRO when the decision had already been taken to cancel this project. However, on the cost benefit analysis, what I can say in terms of the advice that was put up through Vice Admiral Lambert to the Defence Board and Ministers, the cost of the programme and the capability risks that we would be taking were properly articulated. Coming to the judgement upon which they made their decision, they had all the information about the risks we were taking across that period, against all the other assets that we have available in order to deliver an overall ASW capability.
If I can address this question about what are the marginal costs, when we looked at the programme for Nimrod, there were some elements of equipment that we are reusing and transferring into other assets. There are some things coming off the sonar and emission suite that went into the back of Nimrod, which are appearing in the Merlin Mk II Capability Sustainment programme. We are transferring some elements of capability, and that was costed as part of the overall capability.
In terms of the marginal cost of the other assets, as you have very neatly highlighted with Nimrod, this was not just a fantastically capable bespoke asset around antisubmarine warfare, but it had other uses across defence on maritime counter-terrorism, anti-piracy, and maritime C4ISTAR, etc. Look at the other assets we use for antisubmarine warfare: Merlin helicopters, Type 23 frigates, submarines of the Astute and Vanguard class, which contribute to an element of underwater surveillance themselves; they are highly capable assets, but are employed by the individual services across a wide variety of tasks, including antisubmarine warfare.
The allocation of those running costs on a day-to-day basis tends not to be: this proportion of the fixed cost of the fuel for a frigate on this particular day is for antisubmarine warfare. It tends to be done taking the intelligence we have at the time, what the actual employment patterns are and what the mission and everything is. Those costs are included in our existing programme.
Bernard Gray: I will make one final observation on this from my point of view. I accept the Auditor-General's general proposition. I was not here for this decision, so I am not defending some decision that I made or was involved in, but there was sufficient information around the right order of magnitudes of cost for what it would cost to complete, what the additional marginal costs would be, what the running costs are to justify the decision that was taken. It was the right decision that was taken, I think, and it was not close in terms of what the costs were. It was nowhere near close, because the other costs were at least an order of magnitude lower than the amount of money saved.
I personally believe-though it is a classified issue- that the level of risk being accepted in that was an acceptable one, and it was also correctly judged. Therefore this was not a close 4-3 result; this was a 5-0 result, and I am confident the Department made the right decision. The only question would be: would you make a decision earlier? It is not in question that this was the right choice.
Q79 Chair: The only conclusion from that is £3.4 billion has still been wasted.
Bernard Gray: That is true.
Q80 Stephen Barclay: What is the most projects covered by any single capability SRO?
Vice Admiral Lambert: Probably in the equipment logistics support area where Brigadier Brittain covers a whole range of programmes over all three services.
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5 The cost saving as stated in the NAO Report is £1.9 billion, paragraph 14, page 8