house of commons committee of public accounts · 4. the component elements of the programme will be...

HC 113

by authority of the House of Commons London: The Stationery Office Limited

House of Commons

Committee of Public Accounts

Carrier Strike: the 2012 reversion decision

Eighteenth Report of Session 2013–14

Report, together with formal minutes, oral and written evidence

Ordered by the House of Commons to be printed 10 July 2013

£10.00

Published on 3 September 2013

Committee of Public Accounts The Committee of Public Accounts is appointed by the House of Commons to examine ‘‘the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit’’ (Standing Order No 148). Current membership Rt Hon Margaret Hodge (Labour, Barking) (Chair) Mr Richard Bacon (Conservative, South Norfolk) Stephen Barclay (Conservative, North East Cambridgeshire) Guto Bebb (Conservative, Aberconwy) Jackie Doyle-Price (Conservative, Thurrock) Chris Heaton-Harris (Conservative, Daventry) Meg Hillier (Labour, Hackney South and Shoreditch) Mr Stewart Jackson (Conservative, Peterborough) Sajid Javid (Conservative, Bromsgrove) Fiona Mactaggart (Labour, Slough) Austin Mitchell (Labour, Great Grimsby) Nick Smith (Labour, Blaenau Gwent) Ian Swales (Liberal Democrats, Redcar) Justin Tomlinson (Conservative, North Swindon) Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/pac. A list of Reports of the Committee in the present Parliament is at the back of this volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee is Adrian Jenner (Clerk), Sonia Draper (Senior Committee Assistant), Claire Cozens (Senior Committee Assistant), Ian Blair and James McQuade (Committee Assistants) and Alex Paterson (Media Officer). Contacts All correspondence should be addressed to the Clerk, Committee of Public Accounts, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5708; the Committee’s email address is [email protected]

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Contents

Report Page

Summary 3

Conclusions and recommendations 5

1 Strategic decision making on military capability 7

2 Risks to the delivery of the Carrier Strike programme 10

Formal Minutes 12

Witnesses 13

List of printed written evidence 13

List of Reports from the Committee during the current Parliament 14

3

Summary

In October 2010, the Ministry of Defence (the Department) decided on the basis of deeply flawed information to change the type of aircraft to be flown from the two aircraft carriers under construction for the Carrier Strike programme. In 2012, when the Department realised that this decision would result in additional costs and delay, it decided to revert to the original choice of aircraft. Despite this change of mind, the Department still faces major challenges to the affordability of the Carrier Strike programme, particularly with the uncontrolled cost growth in the aircraft and carriers, and the misalignment of essential capabilities such as the radar system needed to protect the carriers. In addition, the Department might not have the skills or capability to manage the programme despite having some 400 staff working on it.

5

Conclusions and recommendations

1. The Carrier Strike programme comprises two new aircraft carriers, the aircraft that will operate from them, and a new helicopter-based early warning radar system (known as ‘Crowsnest’). As part of the 2010 Strategic Defence and Security Review, the Department decided to change the type of aircraft to be flown from the carriers from the Short Take-Off and Vertical Landing (STOVL) variant of the Joint Strike Fighter to the carrier variant. In 2010 the decision was justified by claiming the alternative aircraft would both save money and enhance capability. Yet 18 months on the Department yet again changed its mind. In May 2012, the Department asserted that the benefits expected from switching to the carrier variant of the aircraft would not be achieved, the costs of switching would be significantly higher than projected, and it would delay the operation of the new carriers. Accordingly, the Department decided to revert to the original aircraft type and announced that it would once again be buying the STOVL variant. That change of mind will cost the taxpayer at least £74 million more, though final costs will only be known in 2014.

2. The Department has a history of making poor decisions, based on inadequate information. In this case, the Department provided decision makers with deeply flawed information on the benefits of changing the type of aircraft which included basic errors, such as omitting VAT and inflation from the costs of converting the carriers. The Department attributed these mistakes, which have cost taxpayers at least £74 million, to the process being rushed and secret.

Recommendation: For the 2015 Strategic Defence and Security Review, the Department must plan now to provide decision makers with improved information, sufficient time to consider options rationally and avoid repeating the mistakes of the 2010 decision.

3. In justifying its further changes the Department said it had altered its view on the urgency of securing the new capability in service and on how it was going to operate with our allies in deploying the aircraft carriers. It does not make for good planning to have a constant change of view which results in changes to specification and requirements.

Recommendation: The Department must determine its needs and requirements thoroughly and transparently and then do all it can to stick to these over time.

4. The component elements of the programme will be delivered piecemeal, reducing the benefits from the sums invested. There is a two year gap between the planned delivery and initial operation of the first carrier and aircraft in 2020, and the early warning radar system Crowsnest in 2022, which is essential to protecting the carrier and its crew. In addition, some support shipping will be 30 years old when the carrier comes into service but the Department does not yet have funding to replace them.

Recommendation: The Department needs to align the delivery of the various component projects of Carrier Strike to make the most effective use of its significant investment. It must provide decision makers with the necessary information to

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prioritise and allocate appropriate funding for the programme and the support shipping to operate the carriers, as part of the 2015 Strategic Defence and Security Review.

5. Carrier Strike remains a high risk programme as the Department has little control over the technical risks and costs involved in acquiring the aircraft. Despite assurances from the Department, we are not convinced that it has the aircraft contract under control. Although Carrier Strike is over five years from planned operation, significant technical issues, costs and delivery dates for the aircraft are not resolved. There are also significant cost risks associated with in-service contracts for maintenance which have yet to be resolved.

Recommendation: The Department must seek to minimise outstanding risks as soon as possible and it should, drawing on its experience of other aircraft programmes such as Tornado and Typhoon, exert its influence with international partners to ensure that the support arrangements take full account of UK requirements.

6. The Department has not yet completed crucial negotiations with industry over the carriers. The current carriers’ contract is not fit for purpose as it fails to provide industry with any real incentive to control costs. The Department has not been able to transfer delivery risks to contractors and has struggled to manage its relationship with UK industry.

Recommendation: The Department must establish clear cost and time baselines for the completion of the carriers, which the Department must use to monitor progress.

7. Despite having some 400 staff working on Carrier Strike there is a risk the Department is not managing the programme effectively. Although the Department employs some 400 people on this programme, it may not have the right procurement skills to manage the risks in delivering Carrier Strike effectively. We recognise there have been cuts to this function, but question whether the team is now the right size or if further significant reductions are possible. We are concerned that the Department’s staff are wasting their time with bureaucracy and duplicated effort in having to make detailed checks on the operations of contractors, raising a question as to the quality of the contracting process.

Recommendation: The NAO should examine whether the Department has the appropriate mix of staff, skills and capability in procuring equipment and support from industry and whether the Department’s processes for managing contracts are fit for purpose.

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1 Strategic decision making on military capability 1. The Carrier Strike programme includes two new aircraft carriers, the aircraft that will operate from them, and a new helicopter-based early warning radar system (known as ‘Crowsnest’). In 2007, the Ministry of Defence, (the Department) decided to procure the Short Take-Off and Vertical Landing (STOVL) variant of the Joint Strike Fighter as the aircraft to operate from the carrier. In October 2010, as part of the Strategic Defence and Security Review, the National Security Council which is chaired by the Prime Minister, decided to switch to the carrier variant of the Joint Strike Fighter arguing this was a better value option, saving money and enhancing capability including ‘cross-decking’ (the ability to land on another countries’ aircraft carriers).1 This required the installation of additional equipment, supplied from the USA, on the carrier to launch and land the aircraft (by catapults or ‘cats’ and landing recovery equipment or ‘traps’). We reported on our considerable concerns in November 2011.2

2. In May 2012, the Department concluded that the expected benefits from switching the type of aircraft for the carriers would not be achieved as the costs involved would be significantly higher than projected and switching would delay the operation of the carriers. Within an 18 month period, the Department changed its mind again and announced that it had decided to revert to the original STOVL variant of the aircraft. On the basis of a Report by the Comptroller & Auditor General, we took evidence on this decision from the Department.3

3. The Department conceded that the decision taken in 2010 had been based on deeply flawed and immature information.4 It attributed the basic mistakes that had been made to time pressures, secrecy in the way decisions were taken and a failure to prepare for all the options considered under the 2010 Strategic Defence and Security Review. The Department told us the National Security Council had not discussed the option of switching to the carrier variant of the Joint Strike Fighter until the end of the 2010 Strategic Defence and Security Review. As a result, the Department had had to generate cost estimates quickly. The Department acknowledged that it should have advised the National Security Council, at the time, that it had not had sufficient information to provide an accurate estimate of the costs of switching to the carrier variant. Instead, it had provided a rushed estimate that the cost of converting the aircraft carrier by installing ‘cats and traps’ would be between £500-£800 million. The Department recognised that this had not been based on a proper analysis and accepted that it had been clearly wrong.5

1 Q11

2 ‘Providing the UK’s Carrier Strike capability’, Committee of Public Accounts, HC 1427, 56th report, 2010-12, 29 November 2011

3 ‘Carrier Strike: The 2012 reversion decision’, National Audit Office, HC 63, Session 2013-14, 10 May 2013 http://www.nao.org.uk/wp-content/uploads/2013/05/10149-001-Carrier.full-report.pdf

4 Qq 3-5

5 Qq7-9

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4. By February 2012, the Department’s forecast of the costs of converting the aircraft carrier had risen by 150% to £2 billion. Every element of the conversion cost had increased significantly. These cost increases cannot be blamed solely on the result of a lack of information and unknown, unpredictable costs. Over half were the result of omitting predictable costs, such as the costs of planning the conversion, and basic errors which included omitting VAT and inflation from the costs of converting the carriers.6 The Department agreed that it should have taken inflation into account at the start and believed that it missed inflation off the original estimate due to the pressure it felt rushing to give a cost estimate to the National Security Council.7 The Department’s original estimate assumed VAT on conversion items would not apply, although it did not confirm this with the suppliers in the USA. In December 2011, the Department discovered that the USA required the use of a ‘Foreign Military Sale’ route on conversion items. This route attracted VAT and increased costs by over £130 million.8

5. The original planned operating date for Carrier Strike was 2018.9 The Department initially estimated that the conversion work for the carrier variant could be completed to allow a delivery date of 2020. The Department conceded this had been over-optimistic. It told us the delivery date slipped to 2023 once it had undertaken work to determine how long fitting the conversion equipment would take. Part of the reasoning the Department offered for its decision in 2012 to revert to the original aircraft type was its belief it would be undesirable to delay Carrier Strike beyond 2020.10

6. We are concerned that the Department appears to have changed its definition of ‘interoperability’ to suit what can be delivered. The Department admitted that while interoperability with the French and the Americans remains a priority, the ability to land the carrier variant aircraft on other nation’s aircraft carriers had proven to be more technically difficult than previously thought. The emphasis now was on whether the UK could deliver its Carrier Strike capability to work alongside our allies, which does not include the ability to land aircraft on each other’s carriers.11

7. The Department has estimated that £74 million incurred in switching to the carrier variant option will be written-off by switching back to the original aircraft type. But the Department will not be able to confirm this estimate until 2014. The Department believes that, despite writing-off this sum, reverting to the original decision will avoid £600 million across the 30 year life-cycle of the Carrier Strike programme.12 However, the Department agreed that its cost information is still not mature.13

8. We were concerned that the Department has delayed investment in Crowsnest, the helicopter-based early warning radar system required to protect the carrier and its crew,

6 C&AG's report, para 1.9, Figures 1 & 3

7 Q8

8 Qq 8 & 108

9 C&AG's report, para 1.13

10 Qq 13-15, 108

11 Qq 11-13

12 C&AG's report, para 1.12 and 2.9

13 Q 10

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which is not expected to be fully operational until late 2022. The Department confirmed that when the aircraft carrier comes into service in 2020 it will not be protected by Crowsnest and conceded that this might constrain where the carrier could operate. However, the Department noted that there would be other options for protecting the carrier including land-based airborne early warning and relying on our allies for this capability.14

9. Operating Carrier Strike effectively and safely will require a wide range of other enabling capabilities including frigates, destroyers, aircraft, helicopters, submarines, hydrographic vessels, mine clearance assets and amphibious units.15 The Carrier Strike programme’s capability may be limited if the Department does not upgrade or replace a range of other capabilities, including support shipping where some vessels will be over 30 years old when Carrier Strike comes into operation. The Department told us that it had not agreed funding to replace this shipping and considered that this should be a decision for the next Strategic Defence and Security Review in 2015. The Department acknowledged it could not guarantee the other support programmes would not be touched in the 2015 Strategic Defence and Security Review, or that it could completely protect the Carrier Strike capability in its decisions on funding. It recognised these are all complex and expensive programmes, which would take a long time to deliver.16

10. Realising value for money from the 2012 decision to revert to the STOVL variant of the aircraft will also depend on bringing the second aircraft carrier into operation. The Department told us that this change in aircraft variant provides the option to operate Carrier Strike from both carriers, as it will not have to install ‘cats and traps’ on the second carrier. However, it was still planning to put the second carrier into storage and would not reconsider this policy until the 2015 Strategic Defence and Security Review.17

14 Qq 45 – 72; C&AG's report, para 3.5

15 C&AG’s report, Figure 12

16 Qq 81 - 94 C&AG's report, para 2.13

17 Qq 81, 108; C&AG's report, para 3.7

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2 Risks to the delivery of the Carrier Strike programme 11. The Carrier Strike programme remains high risk. There are significant technical and commercial risks to the timely and affordable delivery of aircraft and the carriers.18

12. In its evidence to the Committee in July 2011, the Department made a strong case for its 2010 decision to reject the STOVL variant to avoid its limitations, which included a shorter range, a smaller bomb bay payload (making integration of UK weapons more difficult), an extra engine and greater complexity, compared to the carrier variant it was then intending to buy. The Department had also pointed out that a vertical landing on the carrier would require significant power and produce a lot of heat and blast, which would have an impact on deck coatings. In hot climates, the aircraft would need to drop its weapons before landing.19

13. Given these shortcomings, we questioned why the Department had decided to switch back to the STOVL variant of the aircraft. The Department explained that its confidence in the STOVL variant had increased since 2010. For example, it expected to implement a solution, known as ‘ship-borne rolling vertical landing’, to enable the aircraft to land on the carrier in hot weather. Despite these assurances we are concerned that significant risks remain.20

14. The Department accepted that it has limited control over the final costs of the aircraft, but maintained that it was gaining increasing confidence in the cost estimates and hoped the cost of each aircraft would fall by 2018.21 The Department explained that it would negotiate on price two years ahead of time and that the price of aircraft would reduce as the number ordered increases. The biggest influence on price would be if there were a significant reduction in the number of aircraft bought by the USA, as this would result in the UK having to bear a higher proportion of the aircraft’s fixed developmental and production costs.22

15. The Department acknowledged it was also exposed to movements in the sterling-dollar exchange rate. It told us it hedges against the risk of long-term adverse foreign exchange movements to provide some smoothing to exchange rate variations, but a significant move in the sterling-dollar exchange rate would inevitably affect the cost of the aircraft.23

16. The Department is currently renegotiating the carriers’ contract and its wider maritime agreement with UK industry, with a view to incentivise contractors more by transferring cost risk. The Department accepted that its original cost-plus contract with industry for the

18 Qq 21 – 35, 75, & 108 – 113

19 ‘Providing the UK’s carrier strike capability’ Committee of Public Accounts, HC 1427, 56th Report, 2010-2012, 29 November 2011; Q 111 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmpubacc/1427/1427.pdf

20 Qq 17, 21 – 35 & 75; C&AG's report, para 3.8 – 3.11

21 Q 18

22 Qq 26, 75

23 Qq 17, 21 – 35 & 75; C&AG's report, para 3.8 – 3.11

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aircraft carriers contains only very limited incentives for the contractors and it does not put any real onus on the contracting companies to keep down the cost of the carriers.24 Currently, the contractors will continue to make a profit until the £5.24 billion target cost has been exceeded by £2.5 billion.25 The Department acknowledged the importance of changing the terms of the contract, and of transferring significant risks to the contractors, if it is to achieve value for money. The Department aims to conclude negotiations over summer 2013.26

17. The Department has some 400 staff working on the three core Carrier Strike projects – the Joint Strike Fighter, the aircraft carriers and Crowsnest.27 The Department maintained that these numbers were necessary when dealing with industry on major projects. The Department justified this approach based on its experience of the Astute project, where it had initially taken a more hands-off approach but then had to step back in to tackle a number of problems which it then struggled to address.28

24 Q 108

25 C&AG's report, para 3.13

26 Q 108

27 Ev 17

28 Q 99 – 105

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Formal Minutes

Wednesday 10 July 2013

Members present:

Mrs Margaret Hodge, in the Chair

Mr Richard Bacon Stephen Barclay Mr Guto Bebb Chris Heaton-Harris Mr Stewart Jackson

Fiona MactaggartMr Austin Mitchell Nick Smith Ian Swales Justin Tomlinson

Draft Report (Carrier Strike: the 2012 reversion decision), proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 17 read and agreed to.

Conclusions and recommendations agreed to.

Summary agreed to.

Resolved, That the Report be the Eighteenth Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Written evidence was ordered to be reported to the House for printing with the Report

[Adjourned till Monday 15 July at 3.00 pm

13

Witnesses

Monday 20 May 2013 Page

Jon Thompson, Permanent Secretary, Bernard Gray, Chief of Defence Staff Materiel and Air Marshall Stephen Hillier, Deputy Chief of Defence Staff (Military Capability), Ministry of Defence Ev 1

List of printed written evidence

1 Ministry of Defence Ev 16

14

List of Reports from the Committee during the current Parliament

The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.

Session 2013–14

First Report Ministry of Defence: Equipment Plan 2012-2022 and Major Projects Report 2012

HC 53

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Committee of Public Accounts: Evidence Ev 1

Oral evidenceTaken before the Committee of Public Accounts

on Monday 20 May 2013

Members present:

Margaret Hodge (Chair)

Mr Richard BaconStephen BarclayGuto BebbChris Heaton-HarrisMeg Hillier

________________

Amyas Morse, Comptroller and Auditor General, National Audit Office, Gabrielle Cohen, Assistant AuditorGeneral, NAO, Tim Banfield, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts,HM Treasury, were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Carrier Strike: The 2012 reversion decision (HC 63)

Examination of Witnesses

Witnesses: Jon Thompson, Permanent Secretary, Ministry of Defence, Bernard Gray, Chief of DefenceMatériel, MOD, and Air Marshal Stephen Hillier, Deputy Chief of the Defence Staff (Military Capability),MOD, gave evidence.

Chair: Welcome. I think that you have got the qualityhere today—Jon Thompson: Obviously.

Q1 Chair: So I hope we can deal with this. This is apretty sorry saga, really. Mr Thompson, the questionsprobably come to you. We are looking at this verynarrow thing: the 2010 decision. How did you get itso wrong?Jon Thompson: The three of us were not personallyinvolved in that decision, but we will try to give thebest explanation—

Q2 Chair: You were director of finance.Jon Thompson: Yes, but if you will recall, there wasa National Audit Office Report at the time that saidthat, as a director general of finance, I was notinvolved in any budgetary matters. There was ahearing in October 2010. Mr Morse is nodding.[Interruption.] Thank you. To the best of ourknowledge, and our explanation would be—

Q3 Mr Bacon: I remember that one of ourconclusions was that perhaps you should have beeninvolved.Jon Thompson: Indeed. I would obviously supportMr Bacon’s conclusion, and that was yourrecommendation.Mr Bacon: What was the name of the permanentsecretary? I cannot remember. Was it Bill?Chair: No, it was after that. It was Ursula.Jon Thompson: The decision was based on—Chair: 2010?Jon Thompson: Yes, it was Sir Bill. The decision wasbased on the best information that officials had at thattime, but that information was deeply flawed—

Fiona MactaggartAustin MitchellIan SwalesJustin Tomlinson

Q4 Chair: Okay, you are justifying it. Were youaround then, Mr Hillier—Jon Thompson: No, I am not justifying it, actually. Itwas deeply flawed and immature.

Q5 Austin Mitchell: Was that Report primarily to dowith financial issues—you wanted to save money?Jon Thompson: No, it wasn’t. It was that a decisionto switch to the carrier variant was made at someconsiderable speed. It was set out in the 2011 Reportand, as that Report says, at the time the decision wasmade, we didn’t have information about, for example,how well cats and traps would work.

Q6 Chair: In this Committee we are often in theposition, particularly with defence procurementbecause it takes so long, that we do not have the rightpeople. You were not around either, Air Marshal?Air Marshal Hillier: No, I was not.

Q7 Chair: What is pretty shocking is that DavidCameron is sent in to bat, and no doubt he was adecision maker, but if you look back at his statement,he says that the previous decision taken in 2006 or2005, which you are now reverting to, was for a moreexpensive and less capable version of the strikefighter. That was his assertion, and he said that thecarrier version of the strike fighter was less expensive,has a larger range and carries more weapons. That iswhat he told Parliament. It concerns me. And,presumably, MOD helped to write his statement.Jon Thompson: Yes. The Prime Minister’s statementwas clearly based on the advice that MOD officialswould have put into the national security secretariat,which advise the National Security Council. Part ofhis statement was based on an assumption that cats

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Ev 2 Committee of Public Accounts: Evidence

20 May 2013 Ministry of Defence

and traps, for example, would cost £800 million,which is clearly wrong, as this Report sets out.

Q8 Chair: Well, we come to figure 3 in the Report,which I think is really shocking. It is an attempt to tryto explain how you got it so wrong. I had assumed itwas the technology—when we looked at it last time,we said you have no idea what the technologicalchallenges are going to be, and you have no idea whatis going to work. When I then looked at figure 3,which is the explanation of why the costs hadincreased massively, I sat there thinking, “Why thehell didn’t they realise this? Why didn’t theyrecognise it?” This is not technology going wrong:this is understanding that you have to have a bit ofdiscussion with the Americans—item one—andtechnical assistance from them. It is the VAT issue,which is so basic that I can’t understand how that wasmissed out. You hadn’t talked to BAE, or taken intoaccount the full cost of UK industry. There are all ofthese items listed here. There is inflation—not to havethought about inflation. There is testing andcommissioning—not to have thought about testingand commissioning. This is not a case of unknownsgoing wrong: these are “knowns” that went wrong.That seems to me to be pretty awful.Jon Thompson: Perhaps Mr Gray would be better atexplaining the difference between them.Bernard Gray: I agree with you. The issue is how itcame to happen—it clearly happened. The decision tomake the switch to CV happened late in the processof the defence review; when we looked back at thedocuments that were around through that period, itwas not in active discussion until the very end of thedefence review, and therefore people were beingrequired to generate numbers very, very quickly.Clearly, my organisation was asked how much catsand traps would cost, for example. My answer to thatquestion—and admittedly I have the benefit ofhindsight—would have been, “I can’t tell you rightnow, because I have to go and do a proper piece ofwork in order to determine what the answer to thatquestion is.” But people feeling under pressure,wanting to give advice to Ministers and so on, rushedat answering the question, and they did not take intoaccount issues such as inflation, which they shouldhave done. Also, the way you choose to procure theequipment—either directly from the manufacturer orfrom the foreign military sales system—makes adifference to whether or not VAT is chargeable. Whenwe subsequently got into conversations with theAmericans, they said “We want you to purchase itthrough the FMS system,” and therefore VAT waschargeable when they previously made the assumptionthat it hadn’t been. That is how that particular—

Q9 Chair: Presumably, in 2006, when they weregoing for the other variant, they would have talked tothe Americans and there would have been a decisionon VAT in relation to that.Bernard Gray: No. This is not about the aircraft—this was the purchase of the catapult system. The pointis that the central underlying problem with the 2010decision is the speed with which it was taken and thesecrecy with which it was taken, which did not allow

either time or access to go and speak to other people.That is at the root of the problem.

Q10 Chair: But the 2012 decision was also takenvery quickly—the NAO says on better information,and I accept that—but it was taken very quickly andpretty secretly. You set up another mechanism of, Iaccept, 15 people—however many—nevertheless, thefear, sitting here and having a déjà vu attitude to it, iswhat was different. It was taken—and we will developthe argument, I am sure, during the course of thehearing—but there are still so many unknowns oncost, and you are coming to the much tougher period,both on the carrier itself and on the costs and viabilityof the planes. What was different in 2012? Or will webe sitting here next year, saying that we are in thesame boat yet again?Jon Thompson: What was different in 2012 from2010 was that both the National Audit Office and yourCommittee had agreed that until we had reached theend of the so-called conversion and developmentphase, which was an 18-month programme tounderstand whether you could implement the policyor not, you did not have a mature date. That was theconclusion of the previous Report and your previoushearing. We got a significant way through that, and,as soon as we had what we thought were significantlyimproved data, we went back to Ministers and said,“Do you wish to carry on with this policy, or do youwant to revisit the decision?”So we did have a significantly better understandingof, for example, EMALS, the technical risks and soon, which are set out in the Report. I think you areright to ask whether that information is completelymature, and the answer to that question is still no. Wecolour-coded whether we thought the information wasmature, and indeed the Report colour-codes thematurity of that information. We were trying to say toMinisters, “We still do not have perfect informationto make a decision, but, as the NAO also concludes,we think there is a significant difference between thepolicy options.” Almost irrespective of how thismoves, we thought that a reversion to STOVL is stillcheaper and with a lower technical risk. You maywant to debate that, but it is the conclusion of theNAO’s Report, and it was our conclusion, too. Wewere trying to be much more transparent withMinisters about the decision-making process andabout the maturity of the data on which they weremaking their decision.

Q11 Chair: One of the arguments in 2010—I amturning to Air Marshal Hillier on this—is that youwanted interoperability with the French and theAmericans. That was one of the assertions in thestatements to Parliament. There are two questions.First, it seems that it was never there anyway, so youwere asserting something that was undeliverable.Secondly, it suddenly became a non-priority—it wasa priority when you were doing the defence review,but it is a non-priority 18 months later. So it was apriority, and you said that you were going to deliverit, but it is unclear that you ever could have done so,and 18 months later it suddenly becomes irrelevant.

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Air Marshal Hillier: Interoperability with the Frenchand the Americans remains a priority, but when wewere talking about interoperability in 2010, I think thefocus was particularly on whether we would be ableto do what is called “cross-decking”—whether wewould be able to land our aircraft on another nation’saircraft carriers. That was proven to be moretechnically difficult than we thought, but, actually, thekey for me is that it is not at the heart ofinteroperability.

Q12 Chair: But it was one of the justifications in2010. I haven’t got the quotation, but one of thejustifications in all the statements put out at that timeto justify the 2010 decision was the idea that we couldall share each other’s carriers.Air Marshal Hillier: As part of the decision that weare talking about today, we discussed with the Frenchand the Americans what exactly “interoperability”means in much more detail. The emphasis was muchmore on whether the UK can deliver a Carrier Strikecapability that will allow us to do proper burdensharing between nations and to be able to operatemore at the operational level—in other words, to workalongside each other. That was judged far moreimportant than just the ability to land aircraft on eachother’s carriers.

Q13 Chair: So you changed the definition of“interoperability” to suit what you could actuallydeliver?Air Marshal Hillier: No, I think we refined thedefinition because we were much more able to discussit with our allies. The other key part of interoperabilityis that, if we had stayed with the CV variant, theearliest point we would have been able to do cross-decking would have been at least 2023. By revertingto the STOVL version, we are able to interoperateand be alongside our allies in 2020. That is a hugeinteroperability benefit, which was reflected by boththe US and the French in our discussions with them.

Q14 Chair: I appreciate how difficult these decisionsare, but the last time you were in front of us it didn’treally matter that we didn’t have an aircraft capabilityfor eight years—I cannot remember the exact figure,but eight years is what comes to mind.Air Marshal Hillier: Yes.Chair: Suddenly, three years becomes absolutelycrucial to decision making. That does not sound verycredible.Air Marshal Hillier: We made the judgment in 2010that that gap was acceptable, but what we discoveredas a result of the work we did on the CV variant isthat the gap was extending all the time and that therewere still significant costs and technical and timerisks.

Q15 Chair: Why was eight years acceptable in 2010,and why, then, did 11 years become unacceptable in2012? I don’t understand. What changed? Again, I amnot directing this at you personally, but shouldn’t theAir Force have already had that argument before2010?

Air Marshal Hillier: The argument was had in 2010and the capability gap was accepted then. As part ofthe work that we went through in 2012, the Chief ofthe Defence Staff, looking at the world as we saw itin 2012, judged that extending that gap by a furtherthree years was not a good idea.

Q16 Chair: Why? What changed his mind? What isso critical about three years? I know nothing aboutdefence really, but it seems that if you accept, in thedefence world, eight years without it—you are goingto use the American and the French carrier capability,I assume, during that period—why not hang on foranother three? What suddenly changed? What makesthe difference?Bernard Gray: It is not the only factor; it is a factor.If you then say, “By the way, we have more cost datathat say that the CV—the cats and traps version—isgoing to be substantially more expensive”, you thenturn to the question, “Do I want to pay more moneyto get a capability later?” There are a variety of otherfactors that go into the balance of the decision. It isnot purely the capability gap.

Q17 Chair: Okay. I don’t know what your latestindications are. One of the aspects that is so scaryabout this is that we have very little, if any, controlover the final cost of the aircraft; that is more or lessentirely in the Americans’ control, as I read it.Bernard Gray: That is true, but we have increasingconfidence in the numbers about what they will cost.

Q18 Mr Bacon: What is the latest unit cost estimate?Bernard Gray: It depends on when you buy them.Effectively, there is a sort of U-shaped curve. Asproduction rates ramp up, the unit prices fall throughthe course of this decade, until around 2018 to 2020,when they hit a low point. Then they are at full rateof production and inflation starts to creep up.

Q19 Mr Bacon: What are the numbers at each ofthose points?Bernard Gray: For each of the variants? Or for the—Mr Bacon: The variant you are going to buy, ratherthan the variant you aren’t going to buy.Bernard Gray: I struggle to remember whether it isin any sense commercially sensitive. From memory,the rough number is around $115 million per C copy.Chair: But the GAO, in its recent reports that I haveseen in a House of Commons briefing, has repeatedits concerns about affordability, the lifetime costs, andthe problems with the evaluation, whereby peoplewho have flown it said that it will get “showdown”every time—significantly below the programmeoffice’s projected targets. That was of February 2013.Aircraft suffered critical failures of equipment every3.9 flying hours on average.

Q20 Mr Bacon: Can I just check with the NAO? Thenumber that I remember from last time was £127million. Was that right? Did I remember correctly?Tim Banfield: The numbers are moving around, andthat would have been for a different variant as well. Itwould very much, as Mr Gray was saying, depend




on where you were on that learning curve as to whatwould happen.Mr Bacon: At the end of the day, I would take thetotal number of planes and divide it by the totalamount paid to get an average unit cost.Bernard Gray: But we also have paid a significantamount into the development phase, so it is not justthe production cost but our share of the developmentcost. It is probably best if we send you a note on thephasing across the decade in the currently projectedunit production cost.

Q21 Chair: Can you answer the question about whatthe assessment seems to suggest and the reports flyingaround in the States: that the costs are likely toescalate and that we have not seen the end of thecosts? The feasibility of the plane also has a questionmark on it. There is a lot to be got right on it.Bernard Gray: With the exception of significantproblems that they have had with the helmet, wherethey have a complex helmet that gives you a head-updisplay and actions on it, which has been technicallyvery significantly challenged, and a couple of engineissues, they are working through parallel developmentand production, which is causing the sort of issuesthat you are talking about. But there aren’t any—if Imight call them this—showstoppers in that. They areworking through issues, but the level of confidenceabout both the B variant and the C variant—theSTOVL variant and the carrier variant—is going upall the time, so I don’t recognise that characterisation.

Q22 Chair: You don’t recognise the characterisationof the GAO—Bernard Gray: Of saying that this is—

Q23 Chair: This is taken out of a GAO report that isin a House of Commons briefing.Bernard Gray: I understand.Air Marshal Hillier: I have read that report and Ithink it needs to be seen in the context that we arefive years away from when we are declaring our initialoperational capability for the aircraft, and ourexperience of these complex programmes is that youwill see technical issues like this arising through theirdevelopment, but in terms of the aircraft that we arebuying, the B model—this does play back, I think, tothe 2010 decision. At that point, the B model was seenas a much riskier proposition than it is now. It was onprobation in the US. It certainly isn’t now. Last year,the US Marine Corps flew two aircraft for three weeksoff one of their carriers—a B model. They are goingto do another exercise this year. That gives us muchgreater confidence that this aircraft will achieve whatwe want it to do. There will be technical issues alongthe way, but that is in the nature of these complex—

Q24 Chair: And cost issues along the way? Are youexpecting the price per unit to go up further?Air Marshal Hillier: It would be for Mr Gray toanswer—Bernard Gray: No, not right now.

Q25 Chair: Not right now.

Bernard Gray: Well, I do not have any informationthat says that it would.

Q26 Chair: None of this stuff, none of thistechnical—Bernard Gray: The parallel development andproduction activity has all been in train for about fiveyears, so that is a known characteristic. The thing thatwould affect the unit production price would be if theUS were to significantly reduce its offtake in thecourse of the next decade, where we’ve got all thefixed costs of setting up the production lines, and thenit depends on how many aircraft—

Q27 Chair: So if one of the other countries pulls outas well.Bernard Gray: But the US is by far the predominantbuyer and therefore it would have the biggest impact.

Q28 Ian Swales: One of the things that I did inpreparing for this hearing was read the transcript ofour previous hearing on 11 July 2011. One is struckby the feeling that the best answers were given on theday, but they don’t bear a heck of a lot of relation tothe current report, so that undermines our confidencethat we are getting a thought-through position today.Let me refer to one specific in illustrating that.Question 111 of our previous hearing was about shorttake-off and landing planes, and in his answer Rear-Admiral Hussain gave four reasons why we were notgoing down that route. One was that the aircraft isinherently more complicated. It has an extra engine.It is doing difficult things, so it is going to be moreexpensive. The second one was: “It had a smallerbomb bay. That meant that, for the integration of UKweapons, we were going to have more difficulty…Third, because of the nature of a short takeoff and…landing aircraft…especially in hot climates”, itprobably needs to dump its weapons before it lands.Fourthly, “the sheer heat and power from the STOVLhad an impact on deck coatings. That was more work,another risk that we were going forward with…thatamount of heat and blast from the aircraft.” So myquestion is: to what extent has an overall financialcase been done—not just in relation to getting rid ofcats and traps, but the total case, so that we do not seeanother table such as figure 3, where there are fivethings we forgot to think about?Air Marshal Hillier: Perhaps I can start off againstthose four headings. First, on the complexity point,that was the judgment in 2010 and in 2011, but asI mentioned earlier, we have got much better data,particularly as a result of what the US Marine Corpshave been doing, and there are no greater risks in theSTOVL version of the aircraft now than there are inthe C model. On that issue, we’ve now just got abetter understanding of it and it doesn’t apply.In terms of the weapons issue, it is absolutely true thatthe C model has a larger weapons bay than the Bmodel. However, the weapons that the UK intends toput in this aircraft fit into the B model weapons bay,so although the C has a bigger weapons bay, it doesn’tmatter for the weapons that we are planning to put in.You might say, “Well, there’s an issue there aboutfuture flexibility,” but just dealing with the




information and the decisions that we have in front ofus today, it doesn’t matter.

Q29 Ian Swales: I would like you to come back tothe other two points, but let me just interrupt you. Theactual quote about weapons was: “Having the largerbomb bay in the carrier variant should make some ofthe integration of UK weapons, which we consider tobe a sovereign capability, relatively easier to do.” Sohave the weapons systems changed, or was thatanswer not true?Air Marshal Hillier: The particular weapon that Ibelieve that he would have had in mind there at thetime was the Meteor air-to-air missile, which we hada concern about—would it actually be too big? Therewas a modification that we have now been able toprogress, which means that it fits in, so I suspect thatthat is what he had in mind.

Q30 Ian Swales: Were you progressing thatmodification anyway, or is that more costs we haveincurred in order to change this decision?Air Marshal Hillier: It would have been progressedanyway, because originally we were going for theSTOVL variant. We went to the CV and then back tothe STOVL, so the work would have been in handanyway. I suspect, I can check, it was probably put inabeyance when we went for the CV, but we came backto it and, as I said, that is not an issue.

Q31 Ian Swales: Sorry, just to be clear for MrThompson, what you have just described there isanother bit of financial cost associated with thisdecision. Has that been taken into account in theoverall decision—modifying a particular weaponsystem? You said that the work was probably inabeyance and now it has been restarted.Air Marshal Hillier: Yes, it was assumed as part ofour work for the reversion. We went through anextensive process of identifying every potential cost,and actually we laid off a significantly greater amountof risk money—if you like—against weaponsintegration, which we have gradually been able toreduce subsequent to the decision we made in 2012.On the point about will the aircraft have to jettisonweapons at heavy weight, then again there wasanother capability, which was under developmentcalled SRVL—Ship-borne Rolling Vertical Landing.Instead of landing vertically, it can land at low speedon the deck. That allows it to land in the appropriateweapons configuration without jettisoning thoseweapons. We had previously been assuming that wewould do that. We stopped doing that work when wewent to CV. As part of our reversion, we put that workback in again and it was fully costed.

Q32 Ian Swales: Can I just stop you there? Again,from the same answer, “In order to get round that, wewere planning on a rolling landing.” Again, that issomething that no one else is doing. It was going tobe innovative in itself. That was an issue that weworried about. We thought we were able to deal withit, but it is still a risk and it is a risk that we have nowremoved, having gone the other way. Is it true that

this is something that no one else has done and we arenot sure how it will work?Air Marshal Hillier: There is nobody else at themoment who is planning to put this into theircapability, but they may wish to use it in future. Is itthe highest risk in the programme? No, it is not. Thefact that it is a capability that only the UK is pursuingat the moment does not mean that we should notpursue it. It is something that we have a solution for.Yes, there are risks; there are risks in any of these, butit is properly bounded and properly costed in there, soat the moment we have confidence that we will beable to deliver that capability.

Q33 Ian Swales: How would you cost that risk—justto help us understand how you do these things? Youare saying that it is a risk that has been costed in.What has been costed in?Air Marshal Hillier: It is a technical capability,because you need to mark up the flight deck on theaircraft carrier. You need to put in appropriate lightingto guide the pilots as they are landing, and there is asoftware capability in the aircraft itself, so these aretechnical issues, which you can develop a solution to,properly bound and put in appropriate risk moneyagainst. It is also worth emphasising that this is notan everyday occurrence. This is a powerful aircraft,and we are talking here about it being in particularlyhot conditions when it is carrying a full weapon loadand a large fuel weight coming back on to the ship. Itwill not happen every day.Jon Thompson: You asked whether the costs wereincluded. They are included on figure 5 in the NAOReport, as best as we can estimate them at the timewe made a decision.Bernard Gray: The other strategic backdrop to this isthat in a programme such as this you are alwayslooking at a balance of risks. What Admiral Hussain’sevidence did not lay weight on are the technical risksassociated with the development of the catapults forexample, which were significant. It is looking at anumber of reasons—I appreciate that you have tomake a judgment in the round about this—why hemight go in one direction. What the financial andtechnical data we have in here suggest is that there isa clear difference between STOVL and CV, which isnot likely to be tipped in a different direction as aresult of some other variables. The gap between thetwo is very large to the extent that my question wouldbe how do you validate the original decision, not howdo you validate the reversion decision? The reversiondecision fundamentally allows for the possibility ofrunning aircraft carriers for 100% of the time, asopposed to 60% of the time, and saves significantmoney in the process.

Q34 Ian Swales: I understand that Mr Gray. Myquestion is simple: are we making the right decisionnow? Will we see another table in one of these annualreports with “Oops, we forgot about that”?Bernard Gray: No. Believe me, we looked at this verycarefully. Changing this decision was notstraightforward. We went through an exhaustiveexercise within the Ministry of Defence looking at all




of the options to make sure that we had flushed outall of the issues and the associated risks.

Q35 Ian Swales: The fourth area was the cost of thedeck having the power and blast of vertical take-off.What is the extra cost of what you have to do to thedeck to take this different type of aircraft?Air Marshal Hillier: I don’t know a precise figure. Iam sure that between us Mr Gray and I could comeback to you with that precise figure, but I can assureyou that that was part of the analysis that we workedthrough. I don’t think it is as big an issue as perhapsmight have been portrayed in 2011. Certainly, now wehave the practical evidence of the US Marine Corpshaving done this for three weeks, it does not seem tobe as big an issue as perhaps might have beenportrayed then.

Q36 Chair: What I was going to ask about thechange in 2012 is that you lose capability. You losecapability on distance and you lose capability on theamount paid out, don’t you?Air Marshal Hillier: Shall I start on that?Chair: Let me just finish my thoughts. You havechanged your mind on capability three times in twoyears, so what confidence can you give us that youare not going to come back in six months’ time withyet another view on capability?Air Marshal Hillier: I can give you that confidence.Chair: Well, you probably won’t be in the job.Air Marshal Hillier: I will.Jon Thompson: I can assure you that he will, Chair.Air Marshal Hillier: In terms of the differencebetween the B and the C model, there is no doubt thatthe C model is a bigger aircraft with a longer rangeand it has the potential to carry more weapons, so initself the aircraft is more capable. However, thejudgment we made is that getting a more capableaircraft, at least three years late at considerableadditional cost, was not as good an option as gettinga slightly less capable aircraft three years earlier, bothat a cost we could afford and with a balance acrossinto other priorities in the defence budget. It is worthpointing out as well that the B model is many timesmore capable than the Harrier which it will replace. Itgoes further; it goes faster. It is a fifth-generationcombat aircraft. It is overall much more capabilitythan we had in the past. On the point about whetherwe are going to change our minds again—

Q37 Chair: I accept it is better than it was in thepast, but you were going for something that gave youthis deep offensive capability, whatever it is, that youare going to lose.Air Marshal Hillier: But that “Well, if we couldafford it and the technical risks were solved we mightget a better capability at some point in the future”, tome, as the capability sponsor, is not as good as “Thisis a lower-risk technical solution that we can affordand we can get it earlier.” I would rather go for that.It is not just me saying that. It is important to highlightthat the Armed Forces Committee, which is the chiefsof each of the services and the CDS, agreed that thatwas the better capability option to go for—

Q38 Chair: Better than what?Air Marshal Hillier: Better than the C model. It wasbetter to go for the B model—

Q39 Chair: Why? Driven by budget rather thancapability?Air Marshal Hillier: No, it was because you get thecapability earlier and you have a much betterguarantee of getting that capability because of thelower technical risk, so that is what the Armed ForcesCommittee agreed. In terms of the deep and persistentcapability, which the C model was partly designed toaddress, the Armed Forces Committee again agreedthat that part of the requirement could be postponeduntil we looked later on, and we are talking intoTyphoon replacements, because the balance ofcapability, risk and priority meant that it was moreimportant to get the earlier carrier strike capability.Bernard Gray: The key thing turns around whetheryou are putting one aircraft up against another singleaircraft. On a like-for-like basis, just on those aircraft,what you say is correct; the C variant is more capablethan the B variant. That is the point that the PrimeMinister made in his Commons statement.Not only do we get the capability earlier, but we havethe option now to use both carrier decks, which allowsus to have that capability for 100% of the time. If wehad converted The Prince of Wales to catapultoperation, we would only ever have had one aircraftcarrier available for about two thirds of the time.Therefore, we would have had about a third of thetime with no capability at all for carrier-basedoperations. For argument’s sake, you have one aircraftthat is 80% as capable as another but it is available100% of the time, or 100% capable aircraft available65% of the time.

Q40 Chair: We said that of the 2010 decision. Wedid, didn’t we?Bernard Gray: You were right.Chris Heaton-Harris: Chair, you are always right, soit is well argued.Chair: Not according to the accountants, I’m not.

Q41 Chris Heaton-Harris: My question is basicallyon the theme of re-specification, because it issomething that the MOD has done really badly in thepast. Now you have made your choice, how are yougoing to stop Air Marshal Hillier changing his mindon the specification of the aircraft in future? Whatsort of contract do we have that helps us keep thosecosts down?Jon Thompson: The answer to your first question isthat we significantly enhanced the governance thatsurrounds investment decisions in 2011, which wassubject to a review by our friends at the NAO and apublic Report about the discipline that we had put into making decisions about changing requirements.There is a connection between our overall strategy andthe amount of money that you have got available andyou have got to balance those two things. We didsignificantly enhance the Investment ApprovalsBoard, which my colleagues are both on; it comprisesseven people. There is now a process of significantlyenhancing the scrutiny of business cases. If Air




Marshal Hillier wants to change the specification ofthe requirement, he has to go through sevenindependent people before he goes to Ministers inorder to get that.Bernard Gray: To add to the point, as it turns out, AirMarshal Hillier is an incredibly disciplined individualwho does not come to me trying to change his mind.It is also the case that this particular aircraft is not, asthe Chair said, designed by us. It is quite difficult forus to change the specification of the aircraft. Wewould have to go in and argue for and pay for andnegotiate the cost of any variations before we alteredthat. As far as the aircraft is concerned, fundamentallywe are a price taker and a capability taker of what thedefined programme is. It is not really in our gift to beable to vary that. We have a process for negotiatingwith the programme office in Washington about whenwe want to buy the aircraft and what, under the salesystem, the price of their aircraft is, depending onwhich year we are buying it, which is the question wewere asked earlier.We have effectively a benchmarked cost for the fly-away price of aircraft. I am currently discussing withthe US our forward buy, for example. That price is abenchmark price that comes out of that process. Thespecification is set and the price is a pretty openbenchmark.Air Marshal Hillier: Could I just add a final point?The other incentive to ensure that I do not change mymind is that I am now the senior responsible owner ofthe programme.

Q42 Chair: But how long are you going to staythere?Air Marshal Hillier: I anticipate being in my currentjob for probably another two and a half years.

Q43 Chair: And you have been there for how long?Air Marshal Hillier: About a year and a half so far.Jon Thompson: Air Marshal Hillier’s posting is oneof the new double-length tours introduced on the backof the Gray report in 2009.Air Marshal Hillier: So I am accountable to thepermanent under-secretary for the delivery of thecarrier programme and the component parts of that. Iwould undermine myself if I were to change thespecification.

Q44 Chris Heaton-Harris: The Committee hasconstantly, throughout its history, raised these sorts ofconcerns. I am very pleased to see the changes beingmade, and I am sure the Committee is, but I want totry to hammer your feet to the mast, as it were, tomake sure you are not going anywhere. Should you,and should things change, we have nailed you on theevidence you are giving today.Jon Thompson: The Committee has had a consistentconcern about SRO appointments, and the reportingof subject costs and so on. We have specificallychanged the SRO policy with direct accountability.The board now has a monthly report on the status ofthe top 50 Government programmes–whether theyhave changed over the last reporting period. TheSecretary of State now chairs a board called the majorprojects review board, which looks at projects about

which we have some concerns, supported by both ofmy colleagues.

Q45 Austin Mitchell: I am just trying to get mymind around all the delays and the arguments aboutwhether it will be available in 2018, 2020 or 2023. Itlooks to me, as a total ignoramus on this matter, asthough that must have something to do with thisCrowsnest operation, without which the aircraftcarriers are very exposed. Unless you have got someplane up there spotting the incoming attacks, these areterribly big beasts and easy to hit, I would havethought. The initial question therefore is, why wasCrowsnest postponed in 2012 if we were going to goahead with the carriers and use the carriers? Why wasit postponed, so the carriers wouldn’t have theprotection of Crowsnest?Air Marshal Hillier: We define the Carrier Strikecapability that we will be delivering in 2020 asbringing together the ship and the F-35B. We havedefined it consistently as our initial operatingcapability from the maritime environment. TheCrowsnest capability has never been part of thatdefinition.Austin Mitchell: You will need a lot more shipsround about to protect it, won’t you?

Q46 Chair: Austin, if you look at figure 12 on page35, it puts Crowsnest—if I am reading it properly—as an essential capability for the Carrier Strikecapability. So it isn’t an add-on, it isn’t anafterthought, it is essential.Air Marshal Hillier: We have never defined it asbeing essential for the initial operating capability. Theway we introduce capability—

Q47 Chair: Sorry to say this to you, but you guyssign off on these Reports. That was a definition—Jon Thompson: Sorry, we didn’t.

Q48 Mr Bacon: Was this Report not cleared?Normally they are.Jon Thompson: Well, we could have an interestingdiversion into whether it was or was not cleared. Inmy opinion, it was not finally cleared in relation tothe specific issue of Crowsnest.

Q49 Stephen Barclay: That is interesting, becausewe had this last time when there were discussions andmultiple Reports going back and forth. Germane tothe point being raised, footnote 11 on page 24 says,“By the end of 2020, under current planningassumptions (which have not yet received investmentapproval)”. Perhaps you might want to clarify whathas not received investment approval, and thereforewhat uncertainty remains.Air Marshal Hillier: I will tie that in, if I may, tocontinuing my previous answer. When we have thatinitial operating capability in 2020, we will have ahighly usable Carrier Strike capability. For the earlywarning that you mentioned, we will have at that stagea greater reliance on either allies or our Type 45,which is a very good air defence capability, or someland-based airborne early warning. Why is that




acceptable? Because we are at initial operatingcapability.Mr Bacon: When you say land-based, do you mean—

Q50 Stephen Barclay: Just a second, Richard. Thatis not what the Report says, Air Marshal. If you lookat that footnote, you see that what it says is, “inextremis,” you will “be able to deploy two Crowsnestsystems without full mission capability, testing orclearance for operational use.” This is based oninvestment that has not been approved.Air Marshal Hillier: As I say, in 2020 we will nothave a fully deployable Crowsnest capability. Thatreflects the fact that we are at initial operatingcapacity.

Q51 Austin Mitchell: Without Crowsnest, it is notonly highly usable but highly sinkable.Air Marshal Hillier: As long as you make theassumption that we will not be working with allies orthat we will not have any of our other capabilities. Itmay, in certain circumstances, constrain where you areable to use the carrier capability, but that is reflectedin the fact that it is an initial operating capability.

Q52 Austin Mitchell: Do the Americans have aCrowsnest system?Air Marshal Hillier: They have a different airborneearly warning system, but that, I think, reinforces—

Q53 Austin Mitchell: And is that extendable to us?Air Marshal Hillier: No. It is a fixed-wing and itwould require cats and traps to operate.Chair: Say that again.Air Marshal Hillier: It is a fixed-wing aircraft that theAmericans use, which would require cats and traps—

Q54 Chair: So we cannot use it?Bernard Gray: We cannot operate it from our carrier,but if we were operating with the Americans, wewould have the benefit of it.

Q55 Chair: Why? How? Do you mean they wouldbe in the same area?Air Marshal Hillier: Yes. You would be able to useother nations’ capabilities. As we then introduce theCrowsnest capability, that works us up to fulloperational capability with Carrier Strike, at whichpoint we will have the Crowsnest available.

Q56 Stephen Barclay: Is what we are saying that wecould not use this against, for example, a Chinese,Russian or other sophisticated enemy, but we coulduse it, perhaps, off the coast of Libya for operationssuch as that, or we could use it if the Americans werealongside us phoning us warnings as and whensomething happened?Air Marshal Hillier: In those sorts of scenarios—thisis exactly my point—we would be working alongsideallies and we would be able to share capabilities. Thisis part of the interoperability piece.

Q57 Austin Mitchell: If we are not, not.

Air Marshal Hillier: That reflects the fact that thereis a difference between initial operating capability andfull operating capability.

Q58 Stephen Barclay: Take a scenario such as theFalkland Islands. If that scenario were happening in2020, would the carrier be fully operational or not?Air Marshal Hillier: That reflects into the footnotethat you mentioned, namely that by the time we getto 2020 we will own four Crowsnest helicopters, ofwhich two would be available to deploy in extremis.Why would we not do that straight away? Becausewe are building up the force and we do not want tocompromise that if we can avoid it. What we aretrying to do here is just do a sequenced, incrementalintroduction of capability, which is the least risky wayto do it.In terms of this approach that I have outlined, this hasbeen fully endorsed by the armed forces committee,and they have agreed that the definition of carriercapability in 2020 is the carrier and JSF with agrowing Crowsnest capability. The point about theapprovals is the fact that we have yet to give maingate approval to the Crowsnest programme. What I donot want as a senior responsible owner is to be in theposition of making commitments until those approvalsare in place.

Q59 Austin Mitchell: So the statement that it will bein operation by 2023 is still subject to possible refusalof approval?Air Marshal Hillier: Well, it is subject to approvalbecause what we have to go through is that disciplinedprocess of making sure that we understand what weare proposing to buy and when it is deliverable, andensuring that it is properly affordable. That work is inprogress, and I believe that the main gate forCrowsnest is in 2014, but I would have to check—Jon Thompson: It is spring of 2014.Air Marshal Hillier: So it is in our programme andwe have the funding identified for it, but until it goesthrough that main gate approval process, it results infootnotes like that. I think it is important that wehighlight those conditions that are in place.

Q60 Chair: The funding is not in this spendingreview settlement; the funding is an assumption intothe next.Air Marshal Hillier: We run a 10-year equipmentprogramme, and it is in that programme. I should alsopoint out that we are constantly looking at thepotential to bring this programme forward, but we willonly do that as part of making sure it is properlyaffordable within our programme. This is thediscipline that we have in our equipment programme.We will only commit when we need to and when it isproperly affordable.Bernard Gray: Can I momentarily illustrate thosethree examples about how we would actually tacklethat problem? In the first instance, in a Libya-typeoperation, we would have the ability to fly ourAWACS aircraft from Italy, so we would be able touse land-based air in the Mediterranean or any of thatkind of environment to give air picture cover that




would cover the carriers as well as Type 45 destroyers,for example.In relation to some major state-on-state conflict—without getting into unnecessary names—theprobability is that we would not be in such a conflictwithout being in operation with allies. If there wassome major, out-at-sea engagement, we would likelybe with French or American carrier groups andoperating under a total air picture recognised andpartly provided by them and partly provided by ourdestroyers.In the case of the Falkland Islands defence, we wouldgo in the direction that the Air Marshal said: from theoutset of the availability of the carriers in that kind ofextremis, if we did not have access for some reasonto the Falklands airfield itself, we would use thedeveloping capability. Those are the three differentways in which you tackle that problem.

Q61 Austin Mitchell: They are still exposed to anExocet missile in a large conflict: protected by theAmericans or not, they are still exposed. These bigthings putting to sea are almost as exposed as theHunter was in 1940.Bernard Gray: They are defended in depth; anymilitary system is vulnerable to a weapon, but theyare defended in depth and it is extremely difficult toget close to them for the range of the kind of stand-off weapons that you are talking about.Amyas Morse: Just to be sure I understand this: I amnot getting involved in debate about the Report. Ithink it was a pretty unfortunate incident, actually—that whole thing. Just to be clear: if there was furtherescalation in the cost of the Joint Strike Fighters weare going to have, because there was a reduction inthe amount of off-take or any of the other things thatmight happen in the years to come, then the chancesare it would be more difficult to bring Crowsnestforward—right? So is it in the same budgetarypackage, or if there are other pressures on theprogramme, cost-wise, what will happen?Bernard Gray: Just for clarity, Crowsnest is currentlyintended to be fielded in the time line that we havehere, so we will have initial capability by the end of2020; full capability by 2022. What Steve is sayingis, is there any possibility to accelerate the deploymentof that?Amyas Morse: That is just what I was asking about;and presumably, is that seen as a total budget packagein Carrier Strike? In other words, if you had slippagein some of the biggest cost components in CarrierStrike, is that likely therefore to mean it is not veryprobable to bring Crowsnest forward?Air Marshal Hillier: The first port of call would bewithin the overall programme envelope, but I thinkwe would pretty quickly be looking across the spanof the equipment programme and deciding what ourpriorities would be.Amyas Morse: But your answer was that it is first ofall in the programme.Air Marshal Hillier: First of all in the group, but thatanswer doesn’t imply that if there is any cross-growthin JSF then Crowsnest is going to get delayed further.It is just good programme discipline that if you have

programme pressures then you should look at dealingwith them—Amyas Morse: My own need for asking it is to beclear—this is a discussion about how in a lot ofcircumstances Crowsnest isn’t going to make adifference, because of allies and because of land-basedsystems, and so forth; and then how it might bebrought forward. Even though there are limitedcircumstances where we would actually use it, nonethe less it might be brought forward. I just want to berealistic. If there are a lot of cost pressures out thereon this programme that are not resolved that mightmean that you weren’t in a position to do that. So,taking a reasonable view of it, we don’t want tooversell the probability of acceleration, I take it.Jon Thompson: Sure. We don’t want to oversell theprobability of what the Air Marshal is saying now, butneither do we want to default to “There is nocapability at all.” We are trying to be balanced that itis somewhere in between those two extremes.

Q62 Mr Bacon: Can I just ask a bit more aboutCrowsnest specifically? The Report says the radar willstart being tested from 2020. That is on the basis ofthe delayed investment, is it?Air Marshal Hillier: Yes. That time line just reflectsthe funding—

Q63 Mr Bacon: So on the basis of the delay ininvestment in Crowsnest, it is true, because of thedelay, as it were, that Crowsnest will begin radar trialsin 2020 and will be operationally effective from late2022. That is correct?Air Marshal Hillier: Yes.Mr Bacon: There is a chap behind you nodding, aswell, which may be encouraging.Air Marshal Hillier: That 2020 date is fixed by ourdecision to delay Crowsnest; so that is the realisticdate of 2020, when we start the radar trials.

Q64 Mr Bacon: Crowsnest is a radar system beingdeveloped by the MOD in conjunction with whom?Which supplier? Is it British or American?Bernard Gray: There is a competition going on. Thereare two—

Q65 Mr Bacon: You haven’t even appointed theperson who is going to do it yet?Bernard Gray: There is a competition going on. Thereare two variants of radar under consideration. One isthe one we already use for this purpose, and the otheris the radar that’s in the F-35 itself.

Q66 Chair: So one is American. Who makes theother one that we use?Bernard Gray: We make it here.Chair: BAE—Bernard Gray: It is Thales.

Q67 Mr Bacon: So it is either Thales or anAmerican one.Bernard Gray: Yes.Mr Bacon: And we don’t know which it will be yet.Bernard Gray: We’re running a competition.Mr Bacon: I see. And the American one is?




Bernard Gray: Northrop.

Q68 Mr Bacon: Okay. It will sit on the helicopterplatform—what helicopter will it sit on?Bernard Gray: The Merlin.

Q69 Mr Bacon: So there is no development problemwith the helicopter—that is already there. It is simplya software problem, as it were.Air Marshal Hillier: It is integration. You are tryingto take an existing radar and put it on to a helicopterit’s not been on before, so it’s an integration issuebetween the two, but we already own the helicopters.

Q70 Chair: What could change to make Crowsnestunaffordable? At the moment you have not signed upto it—it is in your plans.Jon Thompson: What could make Crowsnest on itsown unaffordable?Chair: Well, is it one of your top priorities? There isstill a bit of “the promised land” here.Jon Thompson: You may recall the hearing inFebruary about the overall equipment plan and howwe had approached that. Crowsnest is part of the coreprogramme—I am looking at Air Marshall Hillier andhe is nodding—which is some £8 billion orthereabouts short of the 10-year funding. If there wereto be some explosion of the cost of this programme,the first thing we would look at is using that £8 billionof so-called headroom—you will recall that we gavesome evidence about that. I also think we gave yousome evidence about the £4.8 billion of riskcontingency that we also had. Those are the two areasthat we would look at for all these programmes. Thatis one of the reasons we have not fully committed theequipment programme, which I think you have agreedis not a good idea.

Q71 Chair: Do you still have the assurances that youare going to get the 1% increase in real terms?Jon Thompson: We are still working on thatassumption, but even if we don’t get the 1% increasein the equipment plan over that period, obviously the£8 billion would reduce, but you would still havefunding available for this programme.

Q72 Mr Bacon: How much is Crowsnest expectedto cost?Henry Parker: There is a range from about 120 to400, depending on which solution and how long ittakes.1

Mr Bacon: Is that £120 million to £400 million insterling?Henry Parker: The system we had was a moreexpensive one—Mr Bacon: But that is £120 million to £400 millionsterling, spread over the life of the programme?Bernard Gray: That is correct.

Q73 Mr Bacon: And it will sit on how manyhelicopters?Bernard Gray: Eight.1 Note by witness: Specific figures attributable to each

potential supplier remain commercially sensitive due toongoing negotiations.

Jon Thompson: Eight.Henry Parker: 12 or 16.Mr Bacon: Four, 12, eight—any more bidders?Bernard Gray: Eight.Air Marshal Hillier: It is important here that weshould not commit ourselves to a number of aircraftbecause we are looking at a requirement, but we needto see how much it’s going to cost. One of the leverswe will have if the costs increase is to examine thenumber of platforms we fit it to, so it would bepremature finally to commit ourselves and say, “It isthis number.”

Q74 Mr Bacon: You mean that if it costs an arm anda leg, we would put it on only one and a halfhelicopters, so to speak. That is what happened withthe Chinook HC3, isn’t it?Jon Thompson: In extremis, given that there arepublic expenditure constraints, if what we have to dois change the requirement, we have to look atchanging the requirement.Bernard Gray: The cost of this capability is betweenone and four JSFs, to put it in context.

Q75 Chris Heaton-Harris: On the same theme, inthe United States there has recently been the sequester.There have been reports in the international press thatLockheed Martin said that cuts are likely to inflate thefinal cost of the F-35 itself. That raises an interestingquestion: have you bolted down what we are paying,as it is not an off-the-shelf purchase? Related to that,what if the dollar against the pound movesmassively—have you accounted for that?Bernard Gray: The way the pricing mechanism foreverybody, including the United States, works at themoment is that they are in an LRIP—low rate initialproduction—process whereby they are orderingbatches that are successively coming down in price asthe batch numbers increase and the maturity of theaircraft increases. We have been on a downwardcourse in the LRIP process, and I think we are nowon LRIP 8. We will negotiate two years ahead of timefor the aircraft we are proposing to get—this year andnext we will be negotiating over 2015–16 deliveries.So not all those aircraft costs are yet nailed down,because everybody is negotiating two years inadvance. The lead negotiator on all that is thePentagon with Lockheed Martin, because they are 10times the volume that we are in the marketplace, orthereabouts.We have some forward price visibility. There is a lotof work going on, some of which has been citedalready, where the CAPE, which is the US versionof the cost assurance service that we run, has beenmodelling the costs of initial acquisition and support.There has been a lot of interrogation of that and therewas a significant negotiation between Lockheed andthe Government in the last big LRIP.We have some forward visibility, but not full forwardvisibility, on the unit prices. We know what the US’sshort-term plan is for the acquisition of the aircraftover the next few years. We wait to see whethersequestration has any further impact on those, but ithas had a modest impact so far. As far as the sterling-dollar exchange rate is concerned, you are right to say




that we are exposed to it. We forward-hedge in theway we have discussed previously here. Thateffectively gives us some smoothing, but ultimately,if there was a significant move in the dollar-poundexchange rate, that would affect us at some point.

Q76 Chair: Is there still this ridiculous rule that youare only allowed to do it on one day a month?Jon Thompson: Do what?Chair: Buy forward and cover yourself for exchangerate movements. Am I right that there is only one daya month that you are allowed to do that?Jon Thompson: We use the Bank of England to havea four-year layered rolling hedge, if you really wantto get into it.

Q77 Stephen Barclay: The liability was shifted toDepartments from the Treasury, was it not?Jon Thompson: Yes. We have a four-year rollingprogramme. Every year we purchase 20% of what wethink the next year’s use of foreign currency is forboth the euro and the dollar. We buy about £2 billionof both. We are sitting on positive hedges of severalhundred million pounds in the accounts. Off the topof my head, I cannot tell you what it is.

Q78 Chair: We had this absurdity in a session herewith the FCO. We found that GovernmentDepartments are only allowed to deal in foreignexchanges on one specified date per month.Jon Thompson: I am not familiar with the ForeignOffice’s situation. All I can tell you is that we have aprogramme with the Bank of England on that. We alsoforward-hedge oil prices.

Q79 Stephen Barclay: The point, just to be clear, isthat while it is very positive at the moment and youare in profit on the hedge, within the known risks ofthe programme there could be a loss to the programmefrom exchange rates. That loss would need to be borneby the Department, and not by the Treasury.Jon Thompson: True.Stephen Barclay: Or there could be a surplus.Bernard Gray: The point I am making is that allhedging does is average it over time, fundamentally.That allows us to have some forward predictability,but it probably does not, one way or another, affect theoutcome. We are exposed to significant dollar costsin the programme, and we therefore do have foreignexchange risk.

Q80 Chris Heaton-Harris: On a completelydifferent topic, is there a difference in cost betweenthe manned and unmanned version?Bernard Gray: Of?Chris Heaton-Harris: The F-35.Bernard Gray: There isn’t an unmanned version.Chris Heaton-Harris: Sorry, I thought there was.

Q81 Austin Mitchell: I am just worried about howmuch brass we have got tied up in these great biglumps. We have got these two huge aircraft carriers,which frankly are of no use. I cannot see anyconceivable use for them in any conflict that we havebeen engaged in or are likely to be engaged in. They

would have been of no use in Libya. We managedwithout them. We would manage without them inSyria—if we actually do anything there. The cost isenormous.Paragraph 3.7 expresses the hope that strategicalliances will be “strengthened” if the US is able tohelp us and protect us to lumber these beasts intoaction. If we do lumber the beasts into action,paragraph 3.7 also says that operating continuouscapacity will cost £25 million. If we were to operateboth carriers simultaneously, it will be £60 million ayear. That is not funded and no decision has beenmade on funding. The Crowsnest stuff is not funded.There is all sorts of stuff in appendix four that is notfunded, either, that will be necessary, such as adaptingthe Merlin helicopters to use aboard the new carriers.Some Solid Support Shipping is over 30 years old.There is a huge cost there, which will have to befunded at some stage. We then have the costs of thebig nuclear submarines, which we are not going togive up, for prestige reasons. So much of the Navy’soperational funding will be tied up in big beasts. Itwill not leave much for little things like frigates anddestroyers to chug round the world and be used inbattle. Are we tying up too much of the Navy’sresources and our expenditure in these big monoliths?Jon Thompson: We are significantly recapitalising allNavy assets over the next 10 to 15 years. That iscorrect, but it was the decision of the SDSR and“2020” that we would proceed on that basis, and Ithink it was the decision of the previous Governmentthat we would proceed with the two aircraft carriers.That was the policy decision. To be clear about whatis and is not funded, Crowsnest is funded. That is theanswer that Air Marshal Hillier gave you.In relation to paragraph 3.7, what this decision doesis give a future Government and the SDSR in 2015the option of running both carriers. Under the 2010decision, that option was not there, so this does giveoptionality, and we have tried to cost that so you canunderstand what 100% availability is—or runningboth carriers. Those are what the numbers are inparagraph 3.7. We have not funded that, because wethink that is a decision for the Government in theSDSR in 2015.

Q82 Austin Mitchell: I can see that, but wouldn’t itbe more sensible to rely on the Americans for the bigstuff and for us to run a proper nice little Navy?Bernard Gray: To give you a feel for the size ofthings, the proposed Type 26 frigate replacementprogramme is not quite, but of the order of, twice thesize of the cost of the Carrier programme, so it is notthe case that we are spending all the money on aircraftcarriers and no money on escort vessels. We have justspent—from memory—£6.5 billion on air defencedestroyers, so we have invested significantly inservice escorts and will continue to do so.

Q83 Stephen Barclay: That is where I just wantedto clarify things. How many Type 45 destroyers doyou need once the Carrier group is fully operational?Air Marshal Hillier: In terms of the number ofdestroyers that we would deploy with the aircraftcarrier, it will depend on the operation. In a high-end




conflict it will be a significant number. I think it isperhaps best not to go into those specific numbershere. If it were just a reassurance mission, these areadaptable carriers that we can use for a range ofpurposes—for example, non-combatant evacuation—and perhaps you wouldn’t need that, so there is arange that we are looking at.

Q84 Stephen Barclay: Sure, I appreciate there is arange regarding when you can use the group withoutCrowsnest and when you can’t. But in terms of beingable to say, as a working guesstimate, the carriergroup is fully operational, how many destroyerswould be needed?Air Marshal Hillier: The plan at the moment is thatwe will have 19 destroyers and frigates. That wasannounced in the SDSR. It is very difficult to giveyou a precise answer, because it will depend on theoperation and our allied interoperability. It is difficultto be precise and say that every time we are engagedin this operation, it would have this number ofdestroyers.

Q85 Stephen Barclay: Sure, I appreciate that, but, asa non-military expert, is there not a rule of thumbbetween destroyers and frigates? When we deploynow, which I imagine is not a national secret, what is anormal deployment of destroyers and frigates? I againaccept that capabilities may change if you have morefrigates, but there must be some working estimate thatwe can go with.Air Marshal Hillier: I don’t have a figure that I wouldbe comfortable about giving to you now, but I cancome back to you and give you the examples ofoperational deployments and the number of ships.

Q86 Stephen Barclay: When we deploy a carriergroup now, how many destroyers does it have?Air Marshal Hillier: We don’t have a carrier groupnow.

Q87 Stephen Barclay: What is the cost of adestroyer?Bernard Gray: Build cost or operating cost?Stephen Barclay: Let’s go with both: the build costand the operating cost.Bernard Gray: The build cost for the Type 45s isabout £1 billion each.

Q88 Stephen Barclay: And how many of those dowe have?Bernard Gray: Six.

Q89 Stephen Barclay: It goes back to Austin’squestion. What I am concerned about is, how many ofthose six destroyers are we going to need to use forthe carrier group and what are the implications for ourability to deploy destroyers elsewhere?Air Marshal Hillier: As I say, it will be dependent onthe operational priorities at the time. If we aredeploying the carrier into a high-intensity operation,then clearly you would put a significant number ofthose six against that task, and other lower-prioritytasks would simply not be covered. If it was a moreroutine deployment, on an exercise or a low-intensity

operation, then you would vary that and you would beable to cover more operational tasks. It is not avoidingthe answer; there just is no set answer to this, becauseit is asking me to define a particular operation. Wemake assumptions for particular contingencies, butagain I would have to get back to you outside of thisforum to discuss that, because that is in our secret-level operational planning.

Q90 Stephen Barclay: It may be something that canbe picked up in a note. I am trying to get anunderstanding of the extent to which the areas aroundthe edge of programme perhaps are vulnerable. Towhat extent is Crowsnest vulnerable; to what extentare the costs of destroyers; and what other parts thatare key to a fully operational carrier group are,perhaps, vulnerable to budget pressure, in order tomeet the political imperative of getting some carriersto sea? One can understand those pressures—those arereal-life pressures—but at £1 billion a go, buyingmore destroyers is going to have a significant impact.Bernard Gray: But we have just bought—the last oneleft the Clyde about six weeks ago—and built thosesix. Those are the air-defence destroyers that weintend to carry us through until the 2030s, so we haveall of the air defence assets that we would expect tohave. The aircraft themselves, Crowsnest, the Type 45frigates, land-based air surveillance and Alliance airsurveillance are all part of a multi-layered defence ofthe carriers. You might have one or two that might gowith you one time or you might have a whole packagethat goes out with, if there was some large-scaleoperation, but we have built those.We have existing anti-submarine warfare and generalpurpose frigates, which will come to the end of theirlife in the 2020s. The Type 26 programme is intendedto replace those and that is going through theassessment phase at the moment, and will come intoits main gate around the end of next year. We willthen move into production of those, where we areintending to have the balance of the force composedof those Type 26s.Jon Thompson: Can we try and answer your questionby referring to figure 12 on page 35—the one theChair referred to earlier? I think your question is,which of the capabilities in the grey circle on the leftmight be at any kind of risk?Air Marshal Hillier: Those are all capabilities whichcontribute into Carrier Strike. The key thing is theyalso contribute into a lot of other things in defence, aswell. We look at C4ISR—that is our communicationsand our reconnaissance capability—so, yes, theycontribute there, but there are wider implicationsacross defence. Can I absolutely guarantee that noneof those programmes will be touched, and that theywill completely protect the carrier capability? Wecannot do that at this sort of range because, again,they are complex programmes that are expensive andwill take a long time to deliver.The key thing is that, for my responsibility as SRO indelivering the programme, I understand thesedependencies. I am not just the SRO for theprogramme, in my day job, if you like, as DCDSMilitary Capability I look at that strategic balance andinvestment, so I can see where the money is going




and so I can directly understand whether or not thereis an impact on the programme.

Q91 Stephen Barclay: Sure, but the Report says onpage 29 that there is a risk of divergent views—thisis between the Air and the Navy forces. It states thatthe Senior Responsible Owner continues to facedifficult challenges. I absolutely appreciate thepressure. We are just trying to get some visibility onsome of the other aspects which are components of aneffective and fully operational carrier group, and theextent of risk on that. Within that—Mr Thompson isright in terms of the grey area—the Report says thatsome solid shipping is over 30 years old. Will any ofthat solid shipping still be in use when the carriergroup is launched?Air Marshal Hillier: Yes, it will, but we have a plan:what we would hope to do is replace that shipping.The key thing is that it is not there just for the carrier;actually, only a relatively small percentage of thatsolid support shipping is directly in support of thecarrier. This is required for the whole fleet.

Q92 Stephen Barclay: But in a way, Air Marshal,that is the exact point that I am trying to make: othercapability in other theatres may be put at risk. Whatyou are saying today is that we are going to havesolid support shipping, which is over 40 years old,supporting this brand-new carrier fleet.Air Marshal Hillier: Yes.

Q93 Stephen Barclay: That is also supporting otherNavy operations elsewhere. Then, I imagine it is a bitlike the air tanker in terms of Afghanistan: we getinto huge problems with maintenance, with failure andwith it not being able to resupply a frigate elsewhereif we are running very old—Bernard Gray: No.

Q94 Stephen Barclay: You say no, so by all meanscome back.Bernard Gray: We have solid support shipping thatworks fine and that supports operations today, whichwe will retire in the mid-2020s. Later on, in thisdecade, in a planned way, we will come forward withthe plans to replace that.In answer to the question about whether it would beavailable, yes, it will be available until around 2025when we will replace it with something else. It isworking fine. All of the elements are here: thedestroyers and frigates we have discussed. The MARStankers are on order, being built today and will bedelivered in 2016. The lead commando group exist.Steve has discussed ISR. Our mine warfare operationsare up and running, and we will have an update planin the due course for those, but our current Sandownclass and Hunt class exist and are working today inthe Gulf among other places. We replaced theamphibious shipping and the LPD around the turn ofthe century, for example.The point that we are making is that you have a long,rolling programme of replacement of assets over timethat come in at different phases. We are happy todaythat, as Mr Thompson said, we are recapitalising alarge part of the Navy, but we are doing so in a

planned and budgeted way. It is not that all of themoney is being spent on the aircraft carriers andnothing on anything else.Jon Thompson: Would it help if we gave you a noteof these capabilities, where they are, what theirservice stay is, when they fall out and whether it is inthe programme?Chair: Yes.Jon Thompson: In relation to the inter-service issue,which you raised, we have used the Armed ForcesCommittee, chaired by the Chief of the Defence Staff,to balance the various issues in setting the policy—tomy knowledge, it has been discussed at least threetimes in the last 12 months—so that the Chief is theperson who gives the ultimate policy advice tobalance those issues, working with Air MarshalHillier.Amyas Morse: Thank you for that helpful bit ofdiscussion. We are having a discussion about manydifferent ways of providing capability, which we havefrom time to time. That does not mean that I think itis wrong. None the less, when you are negotiating thedefence budget, you must be saying, “Look, we needat least this many of this type,” and, “Our range ofresponses will be very limited if we do not have thisor this.” In other words, if you are defending thebudget and negotiating for the budget, rather thanexplaining how flexible it is, you must have somebaseline numbers that you put forward to have viablestructural units of capability.I agree that you are renewing models, but the otherthing we have experienced in the past, is finding thatthe numbers of any particular class might shrink abit as we go into actually procuring them because ofbudgetary pressures. I can understand theCommittee’s interest in understanding whether, if wehave got this, that impinges or does not impinge, ordistorts or does not distort, the rest of the capabilitiesand responsibilities that you might have. Are youstretched very thin? We had a similar discussion onthe way in which you were going to be able to protectnuclear submarines going into action when you wereno longer going to have aerial surveillance so youwere going to use helicopters for that as well.Here is a suggestion: the Committee is not beingunreasonable in wanting to understand this moreclearly. Perhaps you could give some consideration tohow you could explain it in slightly more concreteterms. I am not being critical of your answers; I amjust saying that I can understand that it is ratherdifficult to feel whether you have ever got anywherein the conversation if you cannot say: is the wholething getting sub-critical? That is really the question,and if you want to be able to do x number of thingsat the same time, you can only really answer it byunderstanding whether our capacity to do that now isgreater or less than it was a couple of years ago. Pray,explain that. I think that that would be really helpful.Air Marshal Hillier: I understand that, but perhaps Ishould just say that we do have some models. Theultimate reflection is in the number of destroyers andfrigates that we say we need in the SDSR. The pointI was trying to get across is that the methodology thatbuilds up to those numbers is clearly classified. I needto share it in a body other than this Committee the




operational assumptions that we have made, because,clearly, if we start talking about numbers of ships inparticular environments, it is sensitive information.Jon Thompson: Would it help if we tried to work outa way—it is quite difficult in public—to allow youto engage with how the military capability planningprocess works and how it results in the programmethat Steve runs?

Q95 Chair: We did come across once to have abriefing on the negotiation for something. I cannotremember what it was now.Jon Thompson: I think it was on the Harrier.Chair: Yes, it was on selling the Harriers.Jon Thompson: We will try to work out themechanics for the operational scenarios and what theymean in capability planning terms, and so on.Chair: And your staff do not need to feel threatenedby that, as they did last time.

Q96 Ian Swales: That is where I wanted to come in.Knowing what you know now, would you havescrapped the Harriers? Who should answer that?Air Marshal Hillier: I will start off. I was notinvolved in the decision making at the time, so Icannot comment on what evidence was available. Myperception is that the decision made at the time wason what gives us the greatest level of capability. TheTornado was and is a bigger force. It is more capablethan the Harrier was, so I think the decision makingwas based around that.Chair: That is very much a non-answer.Jon Thompson: I will try. The answer to yourquestion is that, when you have a budget deficit of£72 billion, you have to decide what you are going towithdraw from service. Ministers decided, on aprioritised basis, that the Harrier was one of thecapabilities to withdraw from service. As theCommittee is fully familiar with, the Ministry ofDefence got itself in an unbelievably difficult financialsituation. One of the ways out of that situation wasto prioritise and say, “We simply cannot afford to doeverything we have done in the past, and some thingshave to be scrapped.” That was the decision theMinisters made.Austin Mitchell: It was a panic situation.Jon Thompson: That might be your way of putting it,but the way I put it is that, if you are £72 billion in abudget black hole, you have to do something about it.

Q97 Ian Swales: Obviously, that was short-termthinking at the time. I have two points. First, it is hardto imagine the capability planning that we have justbeen talking about—planning that we should haveaircraft carriers without aircraft.Jon Thompson: Capability planning is nothingwithout some frame of reference to what publicresources are available to deliver that capabilityplanning. You have to be framed by some resourceconstraints. I am sure Air Marshal Hillier would havea great long list of other things that he would like todo, but we simply have to be constrained by what thetaxpayer makes available.

Q98 Ian Swales: Thinking about constraints, theseplanes were sold off to America for spares, so theyare still using them. Could we have either delayed ormade the current procurement project cost-effectiveby still having Harriers in service?Bernard Gray: I am a big fan of the Harrier, and Iwill answer your question directly: yes, it was theright decision. We could not afford to run three typesof fast jet. It is not the acquisition cost but theoperating cost of keeping, maintaining, having all thespares and training people to use three types ofaircraft. We had to choose because of the budgetpressure we are under, which is not a short-termpressure; it is a pressure that builds up over thefollowing 20 years. You looked at the budget situationin 2010 and you could see that gap opening out over20 years. We did not have the money in 2010, 2020or 2030 to keep running the systems, so we had tomake some choices. One of those choices was to comedown on the number of types of fast jet that we ran.Harrier was, unfortunately, the least capable of thoseaircraft. As the Air Marshal has already said, the F-35 is twice as fast, has twice the range and carriestwice the payload of the Harrier. It is a substantiallymore capable aeroplane. So, yes, it unfortunately wasthe right choice to stick with the Tornado as a morecapable bomber than the Harrier.

Q99 Ian Swales: On a different matter, how manypeople in the Ministry of Defence work in the carrierarea? How many staff are involved in this wholeexercise?Air Marshal Hillier: If I start at the top level withgovernance, then I am the senior responsible owner,but clearly I have other responsibilities as well. As aresult of the changes we have put in place I have atwo-star, full-time programme director. Within headoffice there is a further programme office of eight.Then at the individual service commands—Navycommand and Air command—they have staff workingon those projects. I don’t know the specific numberbut I can get you that number if you wish. They arelooking at the capability planning. In terms of thedelivery part of it which is in the DE&S—Bernard Gray: In the carrier—I will check thenumber and come back to you—but I have a feelingit is around 100 people working on the ship andprobably about 50 people working on the F-35.

Q100 Ian Swales: The reason for my question, and Iwould appreciate a note on this, is that you rightly usethe word “project”. Once we get to the point wherewe are buying ships from people who know how tomake them and we are buying aircraft from peoplewho know how to make them, then presumably youstand down a lot of these people and move them onto something else. We only do this every decade orso. The worry we have heard in other regards—I haveheard about it from manufacturers—is that there arealways lots of Ministry of Defence people here to helpyou. What they really are doing is re-speccing on aconstant basis. How are you going to avoid thathappening? What will you give the people to do oncethey have finished this project of buying two carriersand aircraft?




Air Marshal Hillier: Those sorts of acquisitions aregenerational activities. We will have the aircraft andthe ships in service for 40-plus years. People willchange naturally through that time. In terms of whenwill we get to that ramp-down point in carrier and F-35, it is a long way in the future.

Q101 Ian Swales: I am not talking about thecapability. I am talking about the people involved inmaking these decisions and making it happen. Surelythere is a point where you need a lot fewer people,isn’t there?Bernard Gray: There is the setting of requirementsand then there is delivery of the equipment itself.While I appreciate that the defence industry will quiteoften say that it wishes to be left alone, thank youvery much, my experience is that that is not on thewhole a good idea. It is fair to say that on mostoccasions when I have pushed on specific issues, theyare not as well covered off as they should be. If I justlet a contract and walked away and invited defencecontractor A to get on with it and “Do just please dropby and deliver the equipment at the end of it and I’llwrite you a cheque”, I am unlikely to get thatequipment.

Q102 Ian Swales: Why?Bernard Gray: Because their control of programmesis not all it might be.

Q103 Ian Swales: So we have to get involved incontrolling the programmes of our suppliers? Is thatit?Bernard Gray: If I can take you back to the mostsalient example of this, in the Astute programme wedid what you suggested. It was a disaster. From 1996to 2003 we let them get on with it. We had a contractand that is what we cared about. In 2003, it almostbroke BAE Systems. It cost them hundreds of millionsof pounds. We then had to step back in, reformulatethe programme and effectively recuperate the wholeof our submarine-building activity, which issomething that is only beginning to come right some10 years after that disaster.

Q104 Ian Swales: I am sorry to press this, but it is athing I find very interesting. How many people doyou need on the MOD side of the house to see that aprogramme like Astute is on track?Bernard Gray: As it happens, on Astute we haveabout 100 people working on various differentcomponents. You are looking bemused, but I canabsolutely promise you that—

Q105 Chair: What I am bemused about is that I thinkyou are right that you need the capability; it is just thenumbers—I don’t know how you get to thosenumbers. Much as I love defence contractors—doI?—I wouldn’t trust them.Bernard Gray: These are matters of detail.

Q106 Chair: A hundred people? I am taken aback bythe numbers.Bernard Gray: These people do a variety of things,which is not just looking at the contractors. We have

to handle all the internal approvals, businesses casesand a bunch of other activity. We also have significantsafety obligations, where we have to check on thesafety of systems, which has been the subject ofdebate before, for example. There is a variety of tasksthat these groups do. My point is that the happy-go-lucky world of us writing out a contract and thenallowing industry to get on with it is not one that Ilive in.

Q107 Stephen Barclay: When we get the figuresfrom Air Marshal Hillier, could we have them brokendown by grade and by whether people are contractors,service staff or MOD staff, so that we can see the fullpicture across the programme?Mr Gray, you said that the up-front capital cost withthe destroyer was £1 billion. The operating cost—Bernard Gray: That is not my bailiwick. I was justtrying to understand whether you wanted capital oroperating.Jon Thompson: We can give you a note on that. It isin Navy command.

Q108 Chair: It is common ground between us thatthe 2010 decision was poor—I’m being kind to it, butit has led to an 18-month delay. The last time we hadan 18-month delay was with the original decision of2006, or whenever it was, when they signed thebudget but did not have the money. That cost us £1.6billion. How much is this delay going to cost us?Bernard Gray: We do not have a delay of that kind.We did not stop what we were doing. The way thatthis was structured was that the adaptations wouldhave been made to the second carrier, not the first. Thefirst one, obviously, is significantly ahead in build, soour strategy has been to carry on building the firstcarrier and to seek the design changes in the second,so we have tried to capture the costs of that. Thecontract that we have for both carriers remained inplace; we did not stop what we were doing in orderto pursue the second carrier’s conversion. One of thereasons for the slippage in the CV option from 2020to 2023 is a recognition, when we did that work, thatit would have taken us much longer to build thesecond ship with the catapults on it—an action thatwill not now happen. Therefore we are close to, butnot quite on, our original timetable.From our point of view, in the control of risk andof complexity—you asked earlier about changes—wehave made a deliberate effort to avoid Ministry ofDefence-specified changes to the original carrier spec,including the treatment of the CV conversion. We heldthat aside and said, “Build the carriers according tothe original spec.” Now that CV has been removed—we have quantified those costs—we have the originalspec for the carriers, which we are carrying through,so there is not a massive cost associated with the CVand then reversion, and significant delay.However, the original contract, effectively, is a cost-plus contract. There is a very minor element ofincentive on the contractors. I am not satisfied withthat contractual structure, which does not put any realonus on the contracting companies to keep the cost ofthe programme down, and I am worried about theirperformance to the schedule in order to deliver the




capabilities. I am therefore in a significant negotiationwith them right now about attempting to change theterms of the contract and to capture not only somesignificant risk transfer to them, but some costs ofitems that were originally excluded from the carriercontract. All that is in the context of the shipbuildingindustry in the UK as a whole, and I am looking toconclude those negotiations with them over the courseof this summer, but it is not yet done.

Q109 Chair: Are you constrained by the industrialstrategy? What I mean by that is jobs, to put it crudely.What are the constraints on you in that negotiation?Bernard Gray: I don’t want to get too far in to thissubject until we are clearer, but fundamentally, themilitary shipbuilding industry has got larger over thecourse of the past five years as we have built thesetwo very large carriers. It has taken on people tocomplete all of this work. From a level, it has goneup and will go down. What we need at the end of thatprocess is a modern frigate/destroyer-buildingcapability in the UK, because we are not going tobuild something of the scale of the aircraft carriersagain for a very long time. There will be a decline inthat, and that is part of this discussion. It is goingfrom, as it were, an artificial high down to a moresustainable lower level.

Q110 Chair: When we get to the final costs of allthese—the lifetime costs, which is another set of coststhat tend to spiral and move out of control—how areyou controlling those in this particular project?Bernard Gray: The lifetime costs of the operation ofthe ship?

Written evidence from the Ministry of Defence

Q59

AM Hillier “I believe the main gate for Crowsnest is in 2014, but I would have to check…”.

Jon Thompson “It is spring 2014”.

Correction

The Assessment Phase 3 is in 2014 with the planned main gate for Crowsnest in 2017.

Q65

Bernard Gray “There are two variants of radar under consideration”.

Correction

There are two potential Mission System providers (Lockheed Martin and Thales), but within this there arefour variants of radar under consideration (Eltra Systems Ltd; Northrop Grumman; Selex; Thales).

Q72

Mr Bacon “How much is Crowsnest expected to cost?”.

Henry Parker states “There is a range from about 120 to 400, depending on which solution and how longit takes”.

Correction (Crowsnest Review Note Cat A 15 Mar 13—IAC 3350)

There is a range in demonstration and manufacture costs from c£230 million to c£500 million, dependingon a number of factors, including who is chosen to provide the Mission System and which radar units are used.

Chair: Yes, and the aircraft—both.Bernard Gray: Of which the aircraft are a moresignificant cost. We are in discussions with the USGovernment and Lockheed about how we collectivelycontrol the costs of the F-35 in service, because asignificant part of how much it costs depends on howthe US chooses to configure itself. It has to put in allthe infrastructure for all the spares and the logisticsmanagement and so on. The costs of that systemsignificantly depend on how the US chooses to do it.That is currently a matter of discussion and is not yetnailed down.

Q111 Chair: So, it is still an unknown.Bernard Gray: It is still an unknown, but we areinvolved in that conversation.

Q112 Chair: When you changed your mind on theaircraft, is there a cost associated there, with shiftingfrom one to the other and back again?Bernard Gray: We have assumed that the STOVLvariant is more expensive to maintain than the CVvariant, and we have included that cost in our total—

Q113 Chair: I understand that. Are they using thefact that you changed your mind?Bernard Gray: No.Chair: They’re not, at all.Bernard Gray: As far as the US is concerned, it iscomfortable with us buying either option.Chair: Has anybody got anything else? Good. Thankyou very much indeed.



Add Footnote: Specific figures attributable to each potential supplier remain commercially sensitive due toongoing negotiations.

1. What are the average unit costs of a JSF Type B? (From Questions 18–20)

(a) The current US estimate for average F35-B Unit cost is $124 million, which equates to £78 million atcurrent exchange rates.

(b) Amplification. This estimate is taken from the US Selected Acquisition Report 2012, released 23 May2013, which states the average F-35B Unit Recurring Flyaway (URF) cost of the F-35B is $124 million inoutturn conditions over the life of the program; the F35 production line shuts down in 2037. Further to this,the Department has undertaken a risk analysis exercise to consider potential variations in cost that could resultfrom sequestration and changes in the buy profiles of other international partners. The profile of annual unitcosts is commercially sensitive data provided by the US Department of Defense and is not publicly releasable.

2. How many units would typically be deployed as part of a Carrier Task Group (from Questions 83–86)

(a) As stated in the evidence to the PAC, the extent of commitment of Forces to operations is missionspecific and scaleable, based on the Commander’s assessment (of mission, threats, operational risk, Rules ofEngagement, intelligence) and in line with Defence Strategic Guidance. As an integral part of a Task Group, theCarrier would expect to operate alongside other platforms to provide a flexible, credible and timely response.Illustratively, this could be a minimal number of Frigates and Destroyers for lower-end, short duration activities,up to a much larger blend of warships, aircraft, helicopters, submarines, hydrographic vessels, mine clearanceassets and amphibious units, in the higher threat environments. These forces would provide (offensive)capabilities to maintain sufficient sea control to execute the mission and permit the carrier to operate withouthindrance.

(b) Amplification. We can provide the PAC with a briefing (at Secret level) on the operational scenarioswhich we are using for planning purposes, and which give an illustration of potential Carrier Task Groupcomposition.

3. How many people, by grade and type (military, civil service or contractor), work in the Ministry ofDefence in the Carrier area? (from Questions 99, 100 and 107)

(a) As of 22 May 2013 there are 399 personnel within the MoD employed (full and part time) in the deliveryof “Carrier Strike,” including QEC Aircraft carriers, JSF aircraft and Crowsnest programmes. Of these, 250are Military, 118 Civil Service and 31 Contractors. A breakdown by grade is shown in table 1 below:

Table 1

PERSONNEL EMPLOYED WITH THE CARRIER STRIKE AREA IN THE DEPARTMENTBY GRADE AND TYPE.

**CONTRACTORS IN PARENTHESES

Rank/Grade 3* 2* 1* OF5 OF4 OF3 OF2 SRs JRs SCS2 B1 B2 C1 C2 D E TOTALEquivalent

No of Personnel 1 4 3 8 33 64 16 78 43 1 8 15(14) 45(17) 36 11 2 399

(b) Amplification. The table details those involved fully or partly in the delivery, planning or operation ofthe core Carrier Strike programmes on 22 May 2013; the number will grow over the life of the programme,with the balance shifting to front-line units. These include, but are not limited to, appointments in Head Office,single Service Headquarters, acquisition and project management within the DE&S, Ship’s Company of QEC,JSF A Squadron, the JSF Test and Evaluation Programme and exchange programmes and secondments withthe US directly related to QEC or JSF. An approximate percentage breakdown of employment by area isprovided in table 2.

Table 2

ILLUSTRATIVE MANPOWER BREAKDOWN BY AREA

Area Percentage

Policy (MoD, Naval and Air Commands) 15Acquisition & Project management (DE&S) 50JSF Programme inc test and evaluation 26Front Line Units (QEC/A Squadron) 7Other Exchange programmes 2



4. What are the Operating Costs of a Type 45 Destroyer? (from Questions 87 and 107)

(a) The annual Type 45 unit running cost at FY12/13 rates is £48.57 million, broken down into threeelements: personnel £8.76 million; fuel, inventory and services £6.41 million; and general ship maintenance£33.40 million.

(b) Amplification. Type 45 is a new to service platform that, so far, has been deployed in a limited way. Asdeployments become more routine we will have a more comprehensive set of data to base the through lifesupport costs on. To mitigate this, the personnel and services figures have been generated against running fourof the six ships in the class. Personnel costs, fuel and inventory have been captured from data logged againstthe ships UIN (cost centre) and the cost of fuel is based on the MoD FY12/13 planning price of £539/m3. Theship maintenance figure was supplied by DE&S in response to a previous PQ, 25th Apr Column 1286W. Type45 Engineering Support is provided under a Contracting for Availability arrangement.

5. Additional Actions

(a) Military Capability Planning. During the hearing the opportunity was offered to brief the PAC memberson how the Military Capability planning process works (Question 94). This presentation will need to be atSecret level and can be delivered at any time convenient to the PAC. This brief will also provide the opportunityto outline how the constituent programmes within the Carrier Enterprise inter-relate. (Question 94).

29 May 2013

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