Defence Select Committee takes evidence on DE&S

The other day an e-mail notification dropped into my inbox (defencewithac@live.co.uk if you have any questions or suggestions). It was a link to the House of Commons Defence Select Committee session on November 13th, when the committee took evidence from; Philip Dunne MP, the Minister for Defence Equipment, Support and Technology; Bernard Gray, Chief of Defence Materiel and; Air Marshal Hillier, the Deputy Chief of Defence Staff (Military Capability).

I spent into the wee hours of the morning having a read and thought there was some interesting points that were worth a closer look. So that's what this article is all about. If you want to read the original copy of the session report it can be found here, though it should be noted that this is the uncorrected copy which means that neither the witnesses nor the committee have had the opportunity to correct any errors in the record, nor is this the final, approved, formal record of the proceedings.

I've also upped the size of the text a little, so you don't have to squint anymore to read it!

The first thing that struck me was this comment from Mr. Dunne;

"It is our intention to accept most of Lord Currie’s recommendations to proceed with a fundamental overhaul of the Yellow Book. As you will know, Bob, it was set up in 1968. There have been countless attempts since then to improve aspects of single-source procurement, and they have tended to take a long time. In the most extreme case, I am told that trying to change one clause in a contract has taken over 10 years and still has not been completed. That was for something apparently as mundane as timber products; this is not at the cutting edge of technology. 

That is clearly unacceptable, and we have told the industry that."

Erm, I'd say that "unacceptable" is just a slight understatement. That would be what is known in the civilian market as 'taking the piss'. 10 years? For a clause in a contract over timber? Hmm. Not a good start.

One thing to keep in mind however is that the minister says "I am told....for something apparently...". Or in other words, he doesn't know for sure, he's just been told about it by a subordinate. Mr. Dunne has not been in this job for long, so is still getting to grips with the details.

I'm reminded when I read something like this of the time that the press had a field day over MoD credit cards being spent on jewellery and bowling trips. In the end, that story turned out to be a non-story, as the bowling trip for example was (much to the papers disappointment) not a jolly boys outing for free loading civil servants, but in fact turned out to be a team building trip for young army recruits.

Timber? Could be related to HMS Victory for example, where no ordinary lump of wood just cut from the nearest tree will suffice. It does seem quite odd though, that it would take ten years to change one clause. I would be interested to see if either the select committee or the National Audit Office (NAO) could do a quick peek into that as part of a wider review and find out what he was referring to?

On a more positive note, it was nice to hear the minister speak about the role of Small and Medium Enterprises (SME) in defence. He told the committee that it was an important priority for him and that the MoD had established a website that would allow SMEs access to contracts worth £10,000 or more, which should provide SMEs with easier access into the defence market.

He also talked about the Centre for Defence Excellence which is designed to showcase new ideas coming from SMEs to the larger Prime contractors and others with an interest in defence, the first of which will take place on December 3rd. 

Mr Dunne then went on to mention the challenges, for example the fact that many of the contracts issued by the MoD are beyond the scope and capability of SME's. I do wonder though if the MoD could do more with SMEs, such as selecting sub components of its own preference that it then wishes to be integrated into designs, as opposed to giving the large contractors carte blanche in this area. 

We often here complaints both from ministers and also from the NAO that there is a lack of transparency from the large contractors into how they spend money with subcontractors. Perhaps if the MoD shouldered a bit more of the burden in that regard themselves, it might help to drive down costs?

In the interest of fairness however I will quickly touch on the opposite side of that argument. The NHS has faced many problems over recent years with centralised purchasing. Some hospitals who just want to purchase small items on an irregular basis have found themselves prevented from doing so, and instead have been forced to purchase items (at greater expense) from approved contractors who won centrally awarded deals. Thus having approved sub contractors can sometimes prevent smaller divisions of big organisations from getting the best price on some items.

Next up, Bob Stewart MP asked the minister what has changed this time around with defence reform? What makes this reform any different from the ones that have come before it? The ministers reply was promising, though a little confusing;

"This Government have tried to tackle the root causes of the problem, so the first thing that we have done to improve procurement is to seek to eliminate the regular annual paring back of projects in order to fit the spend within that year’s budget. From the work that you will have read that Bernard did in his report of 2009, that accounts for close to half the frictional cost, the extra cost, the waste that is inherent in the procurement system because of the way we do it."

MR4A anyone? Or the Astute program? Or the CVF program? Presumably the minister meant from now onwards, because one thing this government has certainly not done is demonstrated the ability to avoid the temptation of scaling back projects 'in year' in order to push the program costs into future years. Hope for the future perhaps? I don't see anyone holding their breath and I suspect that's probably a good bet.

Less optimistic was this assessment a few moments later about changes in the MoD from Bernard Gray;

"I have had conversations in a number of areas of the Department over the past few years where it was as if everything that had been written and said on the subject had never happened, because plenty of people will sit there and assert things that we showed were demonstrably untrue three years ago."

A lack of institutional growth on behalf of the MoD perhaps? The worse thing that could come out of recent reviews by Gray and others such as Lord Levene would be for the MoD to just sweep it all under the carpet and carry on with business as usual. The system of MoD procurement clearly needs some work, so to hear that some members of the Department are trying to avoid facing that reality is a little disconcerting.

If it is business as usual though and projects continue to over run, at least now we have a little more clarity about the fabled "headroom". From the minister, Mr Dunne;

"We refer to the £8 billion as "unallocated," rather than "headroom." The unallocated applies from SDSR 15 onwards, so none of the £8 billion has yet been allocated, and it is relatively unlikely to be allocated this side of the next SDSR. There might be a reason for that to be brought forward, but it seems unlikely. 

We are looking at the remaining £4 billion, which is a contingency to allow for cost overruns, if they occur, on existing programmes. Again, that is more evenly spread across the 10 years. There is a small amount in the current year which allows us-we are just over half way through the current fiscal year. You will be aware that we have been able, through setting up these quarterly decision points, to look at where we are going and the spend each quarter. We have had two of those so far, and in each we have been able to make some relatively modest increments to the programme to use up budget that has become available."

So essentially the MoD has managed to free up £4 billion as a reserve of sorts over the next 10 years. £400 million a year isn't huge though when you consider the scale of the cost over runs that the MoD has regularly incurred in the last ten years. I suspect the minister might be somewhat optimistic if he feels that £4 billion will be sufficient to cover future over runs.

The £8 billion "unallocated" sum is interesting too. Presumably if this is not being spent before SDSR 15 then it stems from budget savings that will not kick into effect for a few years yet? It also begs the question of whether that will be £8 billion of extra money to be chucked around at various new projects, basically setting money aside for the possibility of new operational requirements coming along, or whether that is the government making a hedge provision for the possibility of future budget cuts, by leaving themselves some breathing room after the next election?

Guess we'll have to wait till 2015 to find out. Air Marshal Hillier seems a little less cynical than me;

"... but, with the front-line commands, we are actively planning the sort of projects which we anticipate may need to come into that headroom space-we are not just waiting until that point before we take any action. To the left hand side of that, we are also doing the early assessment and concept phase work to make sure that, once that headroom comes in, we have an idea of what we would like to spend it on so it is prioritised. Then, we can initiate the projects when we need to."

Good luck with that. It would appear the various services are rubbing their hands with glee and lining up for some extra spending. I wouldn't get too excited if I were them. Not least because of what the astute Chair of the committee (Mr James Arbuthnot MP, Conservative, North East Hampshire) then added;

"Q173 Chair: Let me put to you a risk. That risk is that the Treasury will try to take this money back. Do they realise how short-sighted that would be and how that might lead to all the bad behaviour and misaligned incentives that we have seen in the Ministry of Defence for decades past?

Mr Dunne: We have a good relationship with the Treasury.

 

Chair: Of course. They are our greatest friend."

Indeed.

The minister (Mr. Dunne) did respond by saying that the Department are in discussion with the treasury over the possibility of developing an accrual system, presumably one that would allow the department to keep funds that it didn't spend in any particular year, as opposed to the current system whereby funds allocated for a given year have to be spent in that year.

This is one subject that I think has much application across the broad spectrum of government, in that hospitals, schools, local government etc, should be treated much more like independent funds, able to retain left over cash for future uses rather than having to pay back certain unspent sums to the treasury. It would certainly give these organisations more incentive to run efficiently beyond just the threat of cuts.

The next section of the debate went into the issue of the possible change to Defence Equipment & Support (DE&S), with the government keen to adopt a Government owned Contractor operated (GoCo) model. Bernard Gray has covered this issue extensively in the past and those issues were brought up; predominantly the difficulties that DE&S has had in taking on new staff, in particular those deemed to have the sufficient level of expertise for such a complex task, and the problems with being tied to civil service pay and conditions.

This is where I start to get my back up a little. I don't understand how it can be felt that civil service pay and conditions are not sufficient to bring in suitably knowledgeable people. The civil service pay may not be able to compete with the very top levels of some defence companies, but it certainly can put together an attractive package by the looks of things.

Then we have the service members themselves. Are you seriously expecting me to believe that you can't find people inside of your own service who use the equipment on a daily basis that are sufficiently knowledgeable to be able know what it is required of new equipment? Especially when you consider that most of the people at the top end of a lot of large defence contractors walked into their jobs directly from the services.

And before people start talking about negotiating contracts and getting the best price, we have civil servants who have been in their roles for a long while now who should be more than a little aware of what market rates look like. Oh, and then the small matter of MP's supposedly being men and women of business and character, experienced cutters and thrusters who are perfectly placed to represent us in government.... we'll leave that last one shall we?

What makes me most wary is that the government and Mr. Gray both seem to have agreed on essentially the following conclusion; that the way civil servants are recruited and paid is inadequate for the modern world, thus the solution to that problem is to leave that system exactly how it is and instead farm out the DE&S to contractors.

?

No, I don't get it either. If the system is truly that inflexible and inadequate, then bloody well fix it. Don't ignore it, leave it untouched, and then go off on some bizarre side track where you sell the requirement to provide equipment and support to our armed forces off to the highest bidder. Sometimes (re; a lot of the time) the government drives me nuts.

The committee enquired about the possibility of DE&S adopting a "hybrid" solution by becoming a Quasi-Autonomous Non Governmental Organisation, another dreaded "Quango", which would put it on a list with such inherently evil organisations as English Heritage (one of the reasons the fabled bonfire of the Quangos never happened is because actually most Quangos are quite necessary and useful institutions. Not all, but a lot of them). The theory being that it would still be a non-profit organisation without the need for contractors to run it, but would also be free from civil service employment and recruitment terms.

Mr Julian Brazier MP, sitting on the committee, put it like this;

"I find it very difficult to understand your last answer. Just to recapitulate[sic], clearly, DE&S plus cannot overcome civil service pay and conditions or ignore the extremely clumsy arrangements for recruiting people and so on, because, as you say, you are still inside the civil service model. But the Olympic games did not have any problems with the hybrid model. They got the people they wanted in the arrangement they wanted. If you compare GoCo against the manifestly flawed baseline, you are not really doing a fair comparison. What I do not understand is why you aren’t looking at the hybrid model. Certainly, for the Olympics, they were able to get away from those problems, and they have not taken on all those extra risks of the GoCo model."

Mr. Dunne responded, as government ministers seem to have an extreme tendency to do these days, by fobbing the question off to someone else, specifically Bernard Gray. But he did say one thing briefly before passing it on that is worth a closer look;

"... but before I do, one of the big contrasts between the Olympics and what we are talking about is that the Olympics benefited from having an end date. There was a clear date by which everything had to happen, or else we would be in a terrible mess. That provided a discipline throughout the chain of command, which does not apply in anything else-in this case, where we do not have such a finite end to any of our projects."

Erm, excuse me? Mr. Dunne went on to mention the concept that the Olympics happened and then it was all over, whereas defence projects require through life support which may be for an uncertain term, but that still doesn't excuse the basic hand waving of the fact that defence procurement projects do have an end date.

When a new piece of equipment or service is introduced, it should have an in service date, that being the date by which the piece of equipment is required to be up and running and online for use by service personnel.

That should provide a clear date by which "everything had to happen or else we would be in a terrible mess". Indeed that is part of the problem. We have end dates by which projects are supposed to be coming into service. And they keep being missed, leading to a series of terrible messes. 

In that light, Bernard Grays addition was - frankly - bizarre.

"For the people managing the Olympics, it was much more like, in our terms, a UOR process, where you are able to say, as the managing group of that entity, if someone wanted to turn it from an oval stadium into a square one, which would be the equivalent of some of our requirement changes that we impose on ourselves from time to time, such as, "Do we want catapults on an aircraft carrier or not?", people would be able to turn around, in the Olympics case, and say, "That’s a very exciting idea. If you don’t mind holding the Olympics in 2014 or busting the budget, we can make that change." We don’t have that same forcing discipline from most of the activities that we conduct because the timelines have proved flexible. So a key difference-it was both in the explicit pushback and the self-censorship-was that people tended not to come to the Olympics and attempt to change the specification because they knew that they could personally be blamed for causing the problem. We do not have that same discipline."

Erm, so get that discipline?

I truly cannot understand how someone as obviously intelligent as Bernard Gray could suggest such a thing, that the Olympics benefited from having someone smart enough to say "no, that change will delay the project unacceptably and push us over budget", whereas the MoD could not benefit from such a person.

The time lines have not proved flexible at all. They've proved anything but. We're not talking about a train delivering holiday makers to bloody Blackpool. Projects that run over time put pressure on ageing front line equipment. Projects that run over budget affect the rest of the defence budget, as money is cut from other places to accommodate over spends.

If you feel you need discipline then hire someone with the authority to say no. Hire somebody, or appoint somebody, even if it has to be a minister, whose job it is to control the competing forces that would seek to rework specifications and projects in a way that would cause unacceptable delays or cost over runs.

This is really not that hard. There is often a view that the private sector is somehow inherently better at running projects than the public sector because of some sort of divine wisdom. This is nonsense. The simple difference is that private sector companies have an incentive (profit) to closely monitor costs and time scales. If you simply hired someone in a public sector body to fill that sort of role (monitoring costs and time scales), then you could achieve the precise same effect. 

This really isn't rocket science. Bernard Gray however went on to reiterate;

"What we are saying is that there is not a direct read across in terms of project control because we do not have the same forcing function of that deadline, which John himself would say was extremely important."

Yes you do. You have the very real forcing functions of in service dates and approved budgets. These are not mickey mouse time tables or numbers that can be manipulated at will. They are dates by which military equipment needs to be delivered because the old equipment is getting worn out. And those budgets are set at a level which the government - and by extension the public - can afford. Going over them is not a minor mistake or a small issue. It is an indicator of a serious loss of financial control.

That is one of the most worrying things I see. People talking about budgets as if they were sweets, and that if we hand out too many sweets then it just means that a few more kids end up putting on a few pounds. The reality is significantly more serious than that. In the private sector it results in people losing their jobs and companies going out of business. So it is that the public sector must hire individuals that hold in check the prospective excesses of various projects.

More worrying to me was Mr. Dunne's response to the next question about what sort of contract might we expect between the government and the provider who would take on a GoCo DE&S;

"What we need to be clear about is that a new entity would be incentivised by way of fee. The risk for the asset stays with the Department, and the structure of the fee is something that Bernard can touch on in a moment."

The risk stays with the government and the company is incentivised by fees. That sounds like a recipe for absolute disaster if ever there was one. If the contractor gets it right, they get a handsome reward. If they get it wrong.... they just pass the resulting mess onto the government to sort out.

Defence procurement seems to live in its own world. See, out there in the big wide world of the private sector companies and individuals have to take risks. They have to put their own necks on the line in return for the chance to make profits. Sometimes it works well and they cash in, sometimes in a big way. But sometimes things go wrong and you just have to suck up the loss, write it off and move on to the next opportunity. If you're smart, you'll have insurance to cover some losses.

It is utterly unacceptable that successive government continue to cower in the face of pressure and accept the risk burden for others, while allowing them to reap all of the rewards of a job well done. The government has to grow a spinal column and force contractors to shoulder the burden of risk in return for the potential rewards. If they wont do it then fine, continue with the government owned, government run model. At least that way the government can reap some of the rewards for the risks it takes.

Back to Bernard Gray;

"A potential argument might be, "Well, if you allow DE&S all these freedoms within the civil service structure, what is to stop you arguing that the following 10 other examples should have equivalent freedoms to go out and hire people? What happens to comparabilities within the civil service structure and terms and conditions for pay across all those different bodies?" The Treasury might then say, "This will turn into a free-for-all in public sector pay"-for example."

Yes, heaven forbid that we should adopt a less rigid system of recruitment and retention across the whole of government. What a disaster that would be. The very idea of letting government departments control wages in order to reduce their own costs while bringing in the desired calibre of individuals in certain specific areas certainly sounds like a terrible decision. Best not let any hint of that get out.

Again with Bernard Gray and part of his response to a question regarding whether a trial of the GoCo model has been talked about, perhaps for one or more large projects, in order to test the viability of the proposed system. He brings up some existing examples as defence of the model;

"My third proposition in relation to it is that we have already conducted it, because we have had AWE [Atomic Weapons Establishment] running as a GoCo for 20 years. We have the results of an extensive trial that has been run that absorbs more than £1 billion a year of the Department’s money in the shape of Aldermaston [Home of the AWE], which is working very well."

Working very well is not quite how I would put it. The original company that ran the AWE lost its contract on account of prosecutions over serious safety breaches. Since then it has been taken over by a consortium that includes Lockheed Martin UK and Serco. 

This is the same Lockheed Martin that was criticised heavily for the running of the similar, previously titled Y-12 facility in the US, including a $400,000 fine in the mid 90's for breaching Tennessee laws with regards to the disposal of hazardous waste, and then suffered a major failure in an inspection in the late 90's that halted the restart of various operations, before the company finally sold the facility on.

This is also the same AWE ("which is working very well") that - according to a Freedom of Information request to the Royal Berkshire Fire and Rescue Service by the Basingstoke Gazette - has suffered 158 separate fires since 2000, and is being prosecuted by the Health and Safety Executive after a serious fire in August of 2010. 

So indeed the AWE is hardly a model that should fill people with excitement about the prospect of DE&S being turned over to a private contractor. 

The committee went on to press Mr. Dunne again as to why he thought this government would not suffer the problems of the other, at which point he fell back on the £4 billion headroom and the assurance that industry now knows which projects are being funded and committed to. Which is fine of course, until the government decides that it's not going to fund project x, or commit to project y anymore. A point which I'm sure the industry is well aware of.

It was cheering to hear the minister reaffirm the UK's commitment to spend 2% of GDP on defence, in line with NATO requirements. Or at least it would be if that were actually true. The fact is that Foreign Military Aid and Foreign Economic Aid, both of which are incredibly hard to pin down the precise nature of, make up close to 25% of all defence spending at the minute.

That's not really what I think NATO had in mind when it set its targets. And even then, we are technically in breach of this because based on current GDP figures we would have to be spending around £48 billion a year, which leaves us about £8 billion short including the aid figures, and around £18 billion a year short in terms of actual money spent on military equipment, personnel, training and support.

Next the issue of senior retired officers slotting into large defence organisations was brought up, as was the idea that they could "influence" the government. Naturally the minister rebuffed this and assured the committee that all procedures were being followed etc, but Bernard Gray was a little more bold with his response, assuring the committee that despite being named, he had never had breakfast, lunch or dinner with anyone else mentioned. Let us hope, for Bernards sake, that he's telling the truth or that comment could become very embarrassing very quickly.

The session moved on to the subject of devolving more responsibility for capability planning and delivery to the various service chiefs. During his response, Air Marshal Hillier made this quite enlightening revelation;

"Part of the model is also about making sure that I sit alongside the finance director, because one of the weaknesses of our previous system was that our military capability planning was over-optimistic in relation to the amount of money that was going to be available. The finance director and I now have a conjoined organisation to make sure that does not happen in future. That process is currently running."

So let me get this right; the Deputy Chief of the Defence Staff responsible for Military Capability and the finance director were not previously working closely together? And we wonder why the MoD has so many problems with delivering projects on budget.

Right there is where I leave this review. I don't think we could all handle any more bad news to be honest.

It's one of the good/bad things about this whole defence blogging game. The more you research, the more interesting things you learn about the inner workings of the MoD. The trouble is, those same things you learn lead you to despair about the future of defence procurement.

Some of the things involved I suspect are a lot more complex than can be covered by the committee and their witnesses in one afternoon. But at the same time many of the things that plague defence procurement would seem to be rather obvious to someone with half a noggin in working order.

I'm still baffled by Bernard Grays comment about not having the discipline to control people who wish to introduce new requirements etc into projects that push back delivery dates and push spends over budget. Is this not the whole point of having defence ministers, people who are supposed to provide oversight and make sure the service chiefs are not simply left to their own devices?

Trouble is defence ministers and their bosses in No.10 are becoming almost as much of a hazard themselves to good procurement as the people toying with the money that is assigned.

Personally I'm not convinced by the idea of this GoCo model. There are a number of issues that have affected UK defence procurement over the years, and very few of them are solvable just by switching to a new organisational model. It sounds like the kind of thing an ex-banker or investment type would suggest, as it opened up new opportunities for his chums to get rich....

Remind me again what Bernard Gray used to do for a living? Aside from being a special advisor to Geoff Hoon at one point and having a significant hand in the 1998 Strategic Defence Review, which introduced many of the items which he later criticised in his 2009 report when he called the defence equipment program "substantially overheated ...... with too many types of equipment being ordered for too large a range of tasks at too high a specification" and queried "How can it be that it takes 20 years to buy a ship, or aircraft, or tank? Why does it always seem to cost at least twice what was thought? Even worse, at the end of the wait, why does it never quite seem to do what it was supposed to?"

You tell us Bernard. You're the one that's supposed to be fixing all this.