Q111 Stephen Barclay: You are talking about the supplier contract there. Quite, often one of the particular costs is around the maintenance contract. Are you looking, in terms of the supplier, to start to bundle, perhaps, some of the maintenance issues more with the supplier contracts, or keep them quite separate?
Bernard Gray: One of the elements of the Submarine Enterprise Performance Programme, a separate programme we have made reference to a couple of times, is-where Babcock do a lot of the support work and BAE Systems do a lot of the original construction work-to what extent we are better able to integrate those activities to share cost. The point is, if we decide that that is an activity we want to do, and fundamentally we are going to pay for it one way or another, the question is then: what is the appropriate structure that allows us to build that at optimum cost in a world where some of the constraints are not what we would want them to be? We can only afford to operate so many, and we have to build them at a slower rate than is ideal. We have to make compromised decisions in all of that to keep a capability to continue to manufacture and support a submarine base.
Chair: It might actually be better nationalising it; you control it.
Q112 Fiona Mactaggart: I am not a big nationaliser, but when I listen to your discussion about the yard and the skills base, both of which are risks, it seems to me that these are strategic interests for Britain. It is not just a purchasing decision; it is a national investment decision. I am interested in what conversations you have with others, in BIS or whatever, about the value of protecting that capability, that skills base and that capacity in the UK, and whether it can generate other income for our country, not necessarily building nuclear weapons elsewhere; the skill of building a submarine is a potentially marketable skill in other regards. How strategic are we being? If we are bearing this risk, are we getting the value out of it? That is what I am asking on behalf of the taxpayer. The taxpayer is paying the bill, but are they getting all of the reward?
Bernard Gray: Collectively, the country has made a decision that says having limited liability companies managing aspects of this on our behalf is a better way of doing it than the Government doing it directly, because they bear some measure of risk. The Astute programme has cost BAE Systems a lot of money, and they are very focused on that not happening again; potentially, if it was owned by the taxpayer, that entity might not care quite as much. I am sure that Mr King focuses quite a lot on ensuring this problem does not recur. Even though we bear the ultimate risk, there is benefit in having an incorporated entity managing that activity. You can make a different proposition, but that is where we are today, and that is the judgement that we collectively have made over the last 30 years.
Q113 Fiona Mactaggart: Let me ask about one more aspect of risk. I am concerned about the risks for our defence from the planned reduction in the availability of the Astute class submarines. I am not sure whether we are managing that effectively. Are we confident that we are?
Vice Admiral Lambert: Yes we are. I was talking to the First Sea Lord about this only yesterday morning, and he is quite confident that the risks are manageable. We always have, with all of our platforms, a certain number at high readiness and the other platforms at lower readiness. If we do not have precisely the right number, we will do a number of other things to mitigate that problem. It is an entirely manageable risk, which is managed on a day-to-day basis by Commander Operations for the First Sea Lord, and he is quite content.
Q114 Chair: It sounds to me from what you have said that we ordered too much 10 or 12 years ago. If we can manage with less now, what the hell were we doing? I know it is past, and it is not blaming you lot, but you tot up £3.4 billion there, £1.9 billion on the Astute, the aircraft carriers we are not going to deal with today, because we have already-but £2.8 billion on that. I do not think you are going to do the vehicles; you have put £1.8 billion6 into that so far7. There is a heck of a lot you are putting in, and it is all very well now you have come back to us and said, "We can manage the risk", but what the hell were we doing buying it? We have wasted billions.
Vice Admiral Lambert: Part of managing that risk is that our submarines stay at sea for longer.
Q115 Chair: You could have taken that decision 10 years ago, and saved us all this money.
Vice Admiral Lambert: It means that our people have to stay at sea longer, and it is not something we want to do on a day-to-day basis. The First Sea Lord is willing to do it for short periods of time to manage that risk.
Q116 Stephen Barclay: Paragraph 3.26 says, "The Department is looking at longer term solutions to address the maritime patrol capability" as well. If you are looking at this from the short term as a quick fix, there is not just the impact in terms of submarines; maritime patrols are also an issue. Can you say something about what sort of timescales and barriers there will be in terms of whether the future maritime air capability will be restored. That is going to be hit in the short term is it not?
Vice Admiral Lambert: There are no current plans to replace Nimrod with another aircraft within the 10 year programme. We are looking within the research programmes at what can come on behind that.
Q117 Stephen Barclay: When will a decision be taken on that?
Vice Admiral Lambert: It will depend on the maturity of the research over the next few years.
Chair: There will not be any money anyway.
Q118 Ian Swales: I would like to pick up something that was said earlier: figure 12 shows a nearly 20% overspend on the 10 largest projects. Clearly part of the planning assumption is what overspends or otherwise might happen. The comment was made earlier, about the Astute submarines, that hundreds of millions were wasted because, I think the expression was "We did not understand the complexity", or "There was unexpected complexity". I would like to understand that a bit more, because we have heard the same story on aircraft, and on helicopters. What happened there, and how can we avoid that kind of thing happening?
Bernard Gray: I remember a little of the history, if you would like? A competition was run-and it does expose some of the limits of competition-in the mid-1990s to try and get some competition in against Barrow. Barrow had built submarines forever, and the policy decision was heavily competitively weighted at that time. GEC, which was then separate to BAE, was encouraged to enter as an alternative prime contractor. The timescales of the competition, and the intensity of the competitive process, meant that the two designs that were submitted for competition, for a fixed price, were not as mature as they should have been to be buildable.
The problems were compounded by the fact that, although BAE and Barrow eventually won the competition, having effectively had their situation tensioned by the presence of somebody else, we then decided that we liked some of the characteristics of one boat, and we decided to insert them into the design of the other. That was a deeply unhelpful thing to do, but we did it anyway. BAE was then set to work on a price that they had been driven down to through a competition, with an immature design, which then got altered as a result of that process.
Q119 Ian Swales: That leads into something that we have heard in previous hearings: if I am a defence contractor and I agree to do something, my biggest problem is the people from the MOD who are here to help me, with new thoughts, new designs, new ideas, on the thing that I have agreed to do.
Bernard Gray: This was prior to contract award. They accepted a number of amendments to all of that. This was a poor risk decision on their part, which has cost them hundreds of millions of pounds.
Q120 Ian Swales: Leading on from that to the point I just made, how do you prevent cost escalation as a result of constant changes of specification, and new ideas that are outwith the original agreement?
Bernard Gray: One of the things we are discussing at the moment is how we further reform the position, and there are a variety of proposals around that. In relation to the specific point that you are making, what we need to be able to do is flush out the cost of change. Currently, and historically, we have not been sufficiently clear, partly because of time, to say, "If you want to change this characteristic it is going to cost X. Do you really want to do it, and are you going to have your budget adjusted appropriately to say that you have accepted this increase in cost?" We need a much sharper definition between somebody who has potentially a good idea, but nonetheless it is a change, and when you are designing something on a computer system, when it is much easier to change it than if you already built it and you want to go back and rework the metalwork. Therefore, what is it going to cost you to change something at what point, and do you really wish for this change sufficiently to incur that bill? In the construction industry this would be a classic change order system, where you would expect to get a project manager approved: this is the change, this is the cost, this is the timescale implication; do you accept, yes or no?
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6 As mentioned in Q52 the amount invested in Specialist Vehicles so far in actually £1.4 billion.
7 To clarify if this is concerning the Support Vehicle programme referred to earlier then it should be £1.4 Billion and not the £1.8 Billion quoted. However, only £500 Million of that is committed, the remainder is a budgetary estimate and planning assumption