HCDC INQUIRY – NAVAL PROCURMENT: TYPE 26 FRIGATES AND TYPE 45 DESTROYERS [EXTRACTS] – 20 July 2016

Q148       John Spellar: I just want to … ask about the export potential of these vessels. Although we have done extremely well in aerospace, naval has been much worse. Have we any contracts or even expressions of interest on these vessels?

Parliamentary Under Secretary of State, Ministry of Defence, Harriett Baldwin: Not that I am aware of. Do you want to pick up on that one, Tony?

Chief Executive of Defence Equipment and Support, Ministry of Defence, Tony Douglas: If I may, I will give a very high-level response, because as one might expect, there are some sensitivities around naval exports. The design of Type 26 is attractive to other nations, and consequently people are evaluating whether that might be an opportunity for us to export. Perhaps not surprisingly at the moment, our focus – as I commented to Mr Gray earlier – is now very much on resolving the master schedule and the value for money to be able to get into the Type 26 programme for Her Majesty’s Royal Navy, but there may be longer-term potential outside the United Kingdom.

Q149       John Spellar: That would be most welcome, because up till now the record has been pretty poor. Although France, Germany, Italy and even Spain have been successful in winning orders worldwide, we have been utterly unsuccessful. I can argue as to the reasons for that – about whether we are over-specifying and others have got vessels that are more readily available – but I think we would want a bit more evidence that anybody else is going to be interested in this. It is very important in order to make this affordable. We would like some indication that the MoD have had a sort of change of mind that is adjusting to that world.

Mr Douglas: I think the sentiment that you describe is very clear. I guess there are three key elements of this: design, engineering and manufacture. It is fair to say that the manufacturing side of it is where the greatest challenge is in driving productivity, performance and value for money. That almost certainly will be part of the national shipbuilding strategy’s challenges. There is great opportunity for this nation to capitalise on its excellence in the design and engineering components of it. As I referred to earlier, the Type 26 platform has outstanding capability. The design is approximately 60% complete, and I think that is an area of opportunity. As the Ministry of Defence, we are doing everything we can to support BAE Systems in taking that as a value-added proposition to others over time. It is therefore important to come back to those three thirds, because we are not equally competitive in each of them as we stand at the moment.

First Sea Lord, Admiral Sir Philip Jones: May I add a perspective from my service in the Navy? The distinction is that the Type 26 is a high-end anti-submarine warfare frigate, and it is deliberately designed to be so. Its design enables it to provide high-end protection both to our continuous at-sea deterrent forces and to our future carrier strike groups, and it is deliberately designed to be resilient, noise-quietened and highly effective in countering peer and near-peer threats in the anti-submarine warfare environment. That drives an element of design cost and implications into it, which means that a number of our close colleagues who are also looking for that kind of escort are in the game for Type 26, but many others are not, because it is beyond the needs of what they believe they have to have and of what they think they can afford.

The difference with the general purpose frigate that will come as part of the national shipbuilding strategy is that it is deliberately designed to be a much less high-end ship. It is still a complex warship, and it is still able to protect and defend and to exert influence around the world, but it is deliberately shaped with lessons from wider industry and off-the-shelf technology to make it not only much more appealing to operate at a slightly lower end of Royal Navy operations but of interest to a much wider set of our international partners. We in the Royal Navy will make sure that we work closely with industry to make sure that the eventual design of that ship is appealing to a very broad cross section of potential partners, which is a key part of the strategy for that ship.

Q150       Dr Julian Lewis: Following straight on from that, and looking at the successes that other NATO navies have had in selling warship designs to other countries – the Danish example is one of a fairly basic ship that is very utilitarian but very versatile – would it be true to say that, when it comes to exports, you are expecting to do better with the general purpose frigate than with the global combat ships?

Admiral Jones: Yes, that is correct.

Q151       Dr Lewis: Of course, the general purpose frigates are a long way further down the line. First Sea Lord, I want to begin on the question of warship numbers generally. If I remember correctly, we had 35 frigates and destroyers at the time of the 1997-98 defence review. That then went down to 32 as a result of the review, then down to 31, then 25, then 19. It is often said that 19 frigates and destroyers is a woefully inadequate total. What would be your reaction to the prospect that, at any one time, we might have fewer than 19 frigates and destroyers? What effect would that have on the viability of the Royal Navy?

Admiral Jones: Nineteen frigates and destroyers is the number set in the last two SDSRs, both 2010 and 2015, and the Navy has adjusted both its inputs – people, training, manning and support – and its outputs, such as where we deploy our ships and where we operate, to reflect a destroyer/frigate size of 19. We are operating very comfortably within that threshold at the moment. We achieve that trade-off with our force generation challenge for how we get ships out of the door on operations and with where the Government want us to put them. That is in balance and working well at the moment.

At the moment I am not anticipating, and not planning in my force generation criteria, any change to that, either up or down. We are at 19, and that is the policy and the reality. That is what I am delivering against, and there is no indication that I have to change that.

Q152       Dr Lewis: That wasn’t quite the question. The question was: what will be the effect on the viability of the Royal Navy and its ability to perform its tasks if, for any reason, we found ourselves with an inventory of fewer than 19 frigates and destroyers? Given that so many of your predecessors in retirement say that they consider the figure of 19 to be woefully inadequate for our world needs, particularly if we are looking outwards more as a result of Brexit, would it not be a severe loss of capability for the Royal Navy were the total of 19 to be reduced, even temporarily?

Admiral Jones: Yes. I understand the question, and I have seen some of the evidence that some of my predecessors have given. Were that to come to pass – of course, you describe a theoretical case – we would merely have to do what we have done in the past and tailor our outputs to match our inputs. In the same way that the Navy had to adjust the way it delivered against a number of deployed tasks around the world, we would have to do the same as we came down progressively through those steps of numbers that you described. It is my responsibility to own the force generation of the Navy and be clear with the Government that for a set number of ships you get a set number of tasks. We would merely have to reset that balance.

Q153       Dr Lewis: Before I come back to Mr Douglas, I want to check another point with you. There is no room for manoeuvre, is there, on the out-of-service dates of the Type 23 frigates? The first that is due to go out of service is HMS Argyll in 2023. On the assumption that the numbers are not going to go below 19, as one warship goes out of service, a new one has to be coming into service. Unless I am mistaken about the out-of-service date for the Argyll, that means that the first global combat ship must be coming into service no later than 2023. Is that correct?

Admiral Jones: You are right on the out-of-service dates for the Type 23 frigates. They have been promulgated for all 13 of the class, and they begin in 2023 with HMS Argyll, as you say. It is not impossible that that could be revisited. I think you might have heard some evidence from a member of BAE Systems staff, who said that you could change the out-of-service date of a warship by looking at what you would have to invest in that platform to extend it further in life.

Our current judgment on the Type 23s is that in the mid-2020s they will be at a stage when to extend their lives would be a significant investment. We would have to look at not only their capability but the viability of their hull and their safety certification. It could be done. At the moment there is no plan to extend them and no money in the programme to do so. We are anticipating a solution emerging from the national shipbuilding strategy that will be consistent with the decommissioning plan for the Type 23s, but, as you have already heard, we don’t have that announced yet. That strategy is being worked up.

Q154       Dr Lewis: So if we were delaying the build of the Type 26 in order to save money, we wouldn’t save money, because we would have to spend the money we saved on extending the life of the Type 23s, or we’d have to dip below 19 in terms of availability.

Admiral Jones: That is precisely the trade-off of capability, costs and time that is happening as part of the strategy. Of course, as part of that strategy not only the Type 26 but the general purpose frigate will play into that mathematical equation over frigates and destroyers.

Q155       Dr Lewis: Very briefly, Mr Douglas – and Minister, if you have any observations – my understanding was that for the Type 26 programme, which has been long in the gestation, the first cutting of steel was originally supposed to happen before the end of 2016, unless I am much mistaken. Can you throw any light on that? It appears that there is a cause of slippage, which I know my colleagues are about to investigate. Can you confirm that that was the original intention? We have heard that some suppliers to the Type 26 programme have been advised informally to mothball their contributions, potentially for as much as three years. Do you know anything about that? Is that correct?

Mr Douglas: In reverse order, £1.8 billion has already been committed to the Type 26 programme. In the main, that has been associated with not only the demonstration phase but committing to the long lead time items for the first three ships. So there is a very clear commitment from the Ministry of Defence to support the programme in that regard.

On the point about the cut steel date, that can be determined only once we have got to an investment gateway. We have not progressed through that investment gateway at this point – not until we have concluded the negotiation. I guess in part it comes back to the earlier question. That negotiation – without going into unnecessary detail, for what I imagine are understandable reasons – is about taking the end dates for Type 23 from service, optimising the build cycle to make sure that we have a master schedule that nests, but doing so where it gives maximum possible value to the programme. That is why the challenge with industry at the moment is around performance-based challenges and lead time compression. It is about closing in on a programme that supports the first part of the question, which is the Type 23 out of service dates. That is well in train. I would not like to leave this Committee with any cause for unnecessary concern in that regard.

Q156       Dr Lewis: So am I just wrong about the mothballing advice? Am I just wrong about the fact that it was originally intended to start cutting steel in 2016?

Mrs Baldwin: If I could add to that, the commitment in March to spend £472 million on the long lead items in the supply chain is a very strong one. It is generating activity, work and jobs right across the UK at the moment with those first three ships. I do not recognise the phrase you used – “mothballing” – and I do not think anyone else on the panel would either. Tony is completely correct that no cut steel date has ever been committed to. No fixed date for the start of manufacture has been committed to, and it will not be committed to until it goes through that main gate.

Dr Lewis: Fair enough.

[ … ]

Q166       Douglas Chapman: A number of our witnesses have argued that the key reason for the delay is that the MoD had insufficient funds to start the programme. Is that correct?

Mrs Baldwin: The commitment is to spend £8 billion – that is the budget envelope. We continue to operate towards delivering that commitment in that budget envelope. In answer to Mrs Moon’s question about optimisation for those of us who have come across these kinds of things, it is really finding a solution to those parameters. The detail of that is the subject of the ongoing negotiation between colleagues.

Q167       Mr Chapman: So if all the work you are doing with suppliers who carry the main burden of the contract were settled today, would you have the money to start the programme today? That is the point. Are we good to go on budget?

Mrs Baldwin: Well, I think it is very welcome that through the whole process, the Royal Navy has received a budget settlement that they are pleased with in terms of the commitment that the previous Chancellor made to the overall envelope that we are spending on defence and linking that to the growth in the economy. That is to be welcomed.

As we pointed out earlier, the allocation of the £472 million last March to do some of the long lead time items indicates that we are already sinking significant sums of money into the production schedule. Clearly, we have outlined how much money we are working with and the commitment to the overall budget percentage. The optimisation process is exactly what Tony’s job is – to get the best value for money on an ongoing basis from our commercial suppliers.

Q168       Mr Chapman: In a previous session, and it has been well documented, the former First Sea Lord’s explanation of why the programme had not started was that the Royal Navy had run out of money for this project. That was quite a bold statement to make. If there is an element of truth in that, has the budgetary pressure that he suggested played any part in the decision to delay the production programme?

Mrs Baldwin: As I said, the budget is very clear. It is one that the First Sea Lord owns, and we have all worked together to deliver the required number of ships. We do not recognise or agree with the comments and some of the statements that you have heard previously. We are pleased with the overall budget allocation and it is our job, as a team, to get the best value for the taxpayer while we go through the procurement process. First Sea Lord, why don’t you add a little bit to that?

Admiral Jones: From my perspective, we went into SDSR ’15 with a series of ambitions for future shipbuilding capacity and future growth of the Royal Navy, but they were just ambitions. We had a Type 26 programme that was in assessment phase. We were still working through the maturity of the design for the ship – we hadn’t got it on order. The SDSR gave some very clear direction about future growth of the Royal Navy and future shipbuilding capacity, which involved getting the Type 26 confirmed. The SDSR did that, but it set the target at eight, rather than 13, and I understand that target. They wanted to optimise the build to provide the high-end anti-submarine warfare capability that we needed to protect the deterrent and the carrier strike groups.

That gave a definitive answer, but it also went further and said that we want two new offshore patrol vessels to be built, in addition to the three that were already in build. I can understand the requirement for that, and we will use those ships very effectively. It also set in train the national shipbuilding strategy, with a vision not only to fill the gap of the remaining five Type 26s in order to have a one-for-one replacement of the Type 23s but to go on to build a credible, capable but exportable general purpose frigate design that will not only enable the Navy to start growing in its destroyer and frigate numbers in the 2030s but to get back into the game of very credible and effective surface ship exports. I understand all that, but it is a complex reset of the surface shipbuilding programme, which was going to take time to work through in terms of both our annual budget cycle and the way that we are negotiating the best way to deliver it with our industrial partners. As you heard Mr Douglas describe, that work is going on at the moment. I am comfortable with that, and I can work inside it and see the ambition to grow the Royal Navy, which is at the heart of the SDSR.

Q169       Mr Chapman: I think perhaps you understand some of the frustration felt by the Committee. We were given assurances that cutting steel would be starting this year, 2016. That has a huge impact and huge implications for jobs and skills in the kind of industry that you want to see flourish. If you are not making this kind of investment on the date that we need to do it, how is that going to play out in the longer term? How does it actually affect the equipment planning? Where are the gaps going to emerge? Again, Admiral Jones, some of your predecessors have expressed real concern, as has the Chair, about the gap that will exist as the Type 23s start to come out of operation. We will have multi-million pound carriers at sea without sufficient support. As one of my other colleagues suggested, if anything does go wrong – we have had problems with the Type 45s, for example – how will you meet those problems head on if we are not starting now?

Mrs Baldwin: Obviously, we have a very strong commitment to shipbuilding on the Clyde. Tony, do you want to elaborate a little more on some of those details?

Mr Douglas: It goes without saying that there is a shared urgency to crack on with this. As I said earlier, £1.809 billion has been committed to the first three ships already. The important thing about that £1.809 billion is the long lead time items – the things that are on the critical path and that drive the overall delivery schedule. For example, as an illustration, the gas turbines, the diesel generators and quite a lot of the propulsion system, even the propellers, have already been committed to because they are on the critical path of delivering the first Type 26s.

Q170       Dr Lewis: Can I just interrupt? We have quite a lot to get through. Let’s get it clear that nobody doubts that these ships are going to be built sometime. What is at issue here is a revisiting of the disasters that we had in the past. Lord West has used the example of the gap between the Vanguard and the Astute submarines and the loss of skills. I would have thought that an even better example is the carriers, because those of us with long memories – that is most of us on the Committee – can remember when the carriers were proposed, and it was going to be, I think, £2.9 billion for the two of them. The figure ended up around £4 billion, and it was much later.

What we have been told by sources that we regard as very reliable indeed, including some in the industry, is that there is no reason why, for the building of the first ship, the steel could not have begun to be cut this year, as Douglas says, but for the fact that the MoD budget allocation is too small. Douglas, you referred to Lord West’s evidence. We also heard evidence from Peter Roberts of RUSI, who said:

“The problem with money – this year, in the Type 26 programme, the difference between what is allocated and the actual cost is somewhere around £750 million”.

The message I am getting from outside experts, from within industry and from former First Sea Lords is that if this £750 million or some such figure were made available now, we could get on with it. If it is not, everything is going to be put off for up to three years and eventually these ships will be built – the commitment to building them is not in doubt – but they will be much more expensive and either we will end up dipping below the total of 19 frigates and destroyers being available or we will have to spend money keeping Type 23s in service longer, as we discussed earlier. You are telling us:

“No, no, it is nothing to do with that.”

Really? We believe that if the money was there, this programme could start very soon. Are we wrong about that?

Mr Douglas: I have fully understood. The bridge I was going to make from just qualifying the £1.809 billion is the fact that, if there is a number – you asserted a number, but if there is one – first principles tell us all that there are only two ways of resolving that: we either invest more on behalf of the taxpayer or we negotiate it out through performance, or a combination.

Q171       Dr Lewis: But it is hardly best value for money, is it, to penny-pinch now and then end up spending something like 50% or 60% more on the project later, as happened with the aircraft carriers?

Mr Douglas: If I could perhaps complete the point I was building towards, we are now in the heart of a negotiation. You quite rightly referred to history and best practice. I think they tell us all that committing programmes that have a low level of design fixity is normally the enemy of the good. I think everybody would concur that that is the case. Type 26, from a design maturity point of view, is more advanced than any of the previous classes. That is good news. It is 60% complete. I put it to most people in this room that if you were building an extension on the back of your house, if it was only 60% designed you wouldn’t get it priced to maximise the position on behalf of the end user and the person who is paying for it. We are in a good place right now, but it is important to note that, with 60% design fixity, this is about driving it to closure, which is the road we are on.

Q172       Dr Lewis: So even if the MoD were suddenly granted a modest uplift in the amount of money available, on the basis that spending it now would save much greater costs caused by delay later, you are saying that you wouldn’t want to do it any more quickly?

Mr Douglas: I am saying something completely different. What I am saying is that I have no governance over where the money comes from, but as the chief negotiator I would want to make sure that we get the best possible value for the taxpayer. That, for me, is the key point in all of this. We are on a road, I believe constructively, with BAE Systems, to drive to that position. It requires BAE to step up to the plate as well in regard to performance and in some ways almost to move in on the shipbuilding industry from where it was to where it needs to be to deliver the performance on an £8 billion programme like Type 26. That is the thing that we are resolving at the moment – that is the challenge, in a nutshell.

Q173       Dr Lewis: All I can say is that we will continue to monitor this programme over the next few years very closely and if it turns out to be costing a lot more because we did not start it as early as we could have with a bit more of an injection of cash at this stage, I don’t think the public will be satisfied that they have had value for money. Any other comments on that?

Mrs Baldwin: I will just say that there are lessons to be learned in both directions from the past examples you have cited, Mr Chairman. I think it is important to acknowledge the point that you make about the potential additional future cost from delays, but I would also reiterate the point that Tony just made. Actually, if you start something or move into main gate without the adequate amount of specification – we all know where that has led the in the past and that is why I am backing the approach that he is taking.

Q174       Dr Lewis: That is a very good point, and is relevant to the Type 45 engine that we will be discussing as well. First Sea Lord, do you have anything to add?

Admiral Jones: No, I am content with that.

Dr Lewis: Douglas, did you want to?

Q175       Mr Chapman: There is one question. You mentioned a few times, Mr Douglas, the maturity of the design and it being at that 60% level. I don’t quite understand how you negotiate if you have only got your proposal design to that level. What are the design issues that still need to be resolved and is there any contingency built into the budget to account for that?

Mr Douglas: The design, as I indicated before, factually, is approximately 60% complete at the moment. There is a programme, obviously, to close out. There is a big part of that in the compartmentalisation of the ship’s internal structure and the manner in which many of the communications systems are completed and integrated. I think it is probably important, because we are all aware of the fact, to state that today’s modern capability is a systems integration solution that just happens to be on a floating platform – not to be confused with a traditional class of ship.

Getting clarity around the communications systems, the network backbone and the manner in which all that integration is concluded is on track, but that is another key part to the negotiation I referred to earlier, because we would not want to fix a price before we have got absolute clarity on that close-out. It is all interlinked with the negotiation I described. It requires performance, as I have stressed, from our industry to give us the value that, as a Royal Navy and as taxpayers, we all require.

Q176       Dr Lewis: Any idea of an end date for the negotiation?

Mr Douglas: I wouldn’t want to prejudice that in this hearing today, if you don’t mind, Sir.

Dr Lewis: Fair enough.

Madeleine Moon: Possibly in a year –

Dr Lewis: Or three.

Mr Douglas: Or less.

Admiral Jones: If I could just add an operational perspective to that question? To absolutely agree with what Tony said, we have too often in the past, in the design of warships, raced too quickly to conclude its communications system, its integrated internal communications and its computer networking that enables it to connect to wider forces it operates with, and have paid the price in operational terms of fixing that too early.

That is the area of military technology that is probably evolving faster than anything else, so we want to make that call as late as possible to make sure the ship enters service as credible as possible as an integrated war-fighting platform, and future-proof for the way that capability will evolve over the next few years. I am entirely comfortable if that is the bit of design we are still doing.

Q177       Mr Chapman: Have the Government allowed for contingency within that as well? You allowed for contingency within the Successor programme. Is there a set contingency for this programme as well?

Mrs Baldwin: That is not something that we can disclose at this point in time.

Mr Douglas: I think it is quite important we don’t get into a discussion around contingency. If you were negotiating with me and you knew exactly what my hand was, it would make your life an awful lot easier, Sir. This is about driving performance through value, in the fashion I described earlier.

Mr Chapman: I know there are a lot of similar questions to come your way, but if you can do it for Successor, I don’t know why you can’t do it for the programme. Anyway, we will leave it.

Dr Lewis: Okay, point made, Douglas.

[ … ]

Dr Lewis: To conclude, I want to thank all the witnesses who have been here today, particularly the Minister, who has not been at all afraid to jump in at the deep end – to stick to nautical metaphors – after only two days in post.

I would like to make one suggestion. We have received a very impressive paper, written by retired Lieutenant Commanders Cartwright and Barnes, who have spelled out the difficulties – very similar to what happened with the engines of the Type 45 – that previously happened with the old Tribal-class frigates and County-class guided missile destroyers. They have said that they warned at the time that the abolition of the National Gas Turbine Establishment, known as RAE Pyestock, could lead to precisely those sorts of problems. I propose to send you all that paper, and I would be very grateful for a considered response to it before we produce our findings.

We have all stressed value for money. We fear that the taxpayer does not get value for money if we end up with a delayed Type 26 programme, with additional costs as a result; a refit of the Type 45, the costs of which will be borne solely by the taxpayer; and a naval capacity that may be reduced even below the 19 ships we have at the moment. Those are our concerns; if you found our questioning a little trenchant at times, that was the reason. Thank you all for your contributions today.

[For the full transcript of this Defence Committee session, click here.]