[speaker001:] And er the result of all of that has been that the current development programme scheduled which we have supplied to the committee is probably about as fast as the programme is capable of running. First flight still going to be in April. We are confident it will be in April, yes. And will that aircraft be less capable in its first flight than you'd originally hoped? Erm... it is always been planned... that the... this er release of the flight control system will be phased through five steps and the... capabilities at first flight are more or less what we had been planning er right from the outset. The cost is going to be some three thousand four hundred million I think er t to the U K. That's er e gone up by about thirteen percent four hundred million roughly, er over the original estimate. Half of that is due to programme reorientation because of the... extension of the... programme by two years as I understand it, can you... spell out what those costs are and are we having to pay more because Germany wants to slow the programme down? Perhaps I can ask Mr Perry to er fill in the details on cost.
[Perry:] yes... erm Mr Trotter er that er apportionment of the... four hundred and fifty million between er the effect of... programme re-orientation and other factors.
[speaker001:] Can I just say that I had figured four hundred million it is in fact four fifty.
[Perry:] Four fifty million, sorry, four fifty million erm between programme re-orientation and other factors, was an apportionment we made er back in the er... first part of nineteen ninety three and... in the light of later information I think we would revised that now erm... we are still negotiating with the contractors on the revised contract price and we do not have definitive costs yet but in fact the... costs increased as a result of the rescheduling of the programme directly should be quite modest. There are some unavoidable costs er on that account, particularly on the engine programme where delays to the aircraft programme which result in extra costs on the engine side, are the customer's liability, erm but the... main increase in cost is actually in the equipment area and results I think, from the fact that the equipment prices turned out to be higher than was originally estimated at the start of the programme and also the fact that U K industry won a higher work share on equipment that we had originally been entitled to and budgeted for and lastly the point you mentioned that Germany has withdrawn from some parts of the requirement and that made... certain equipments non-common and we have had to take a larger share of the costs of those equipments than originally planned.
[speaker001:] Okay. Can you spell out how our... share of the cost has increased because our share of the work has increased because I thought presumably the bill was still divided... proportionately between the countries.
[Perry:] No the... the bills are met by er on the territorial funding basis so basically we pay for the work done in the U K.
[speaker001:] From which we will get the benefit presumably when production's done.
[Perry:] In in in in er general terms. Whether the production work sharing is something that is still to be decided er at the start of that phase but on the equipment, we were... er... originally entitled to thirty three percent of the common equipment er... when we last gave evidence to the committee the U K work share for equipment stood at some thirty six percent of those that had been selected at that time. We have succeeded since in getting it down to something just over thirty four percent... now er and erm... therefore we are not much above our original work share but each percentage point of equipment costs us about ten million pounds extra.
[speaker001:] somewhat concerned at the... er production sharing is not yet to be agreed er i i i is there a formula that is going to be applied?
[Perry:] Yes indeed erm the the general M O U states that er work share will be proportionate to the off date that each nation takes.
[speaker001:] So it's dependent upon the finalisation of the orders.
[Perry:] Indeed
[speaker001:] numbers But w what about er er further increases the there seem to be some suggestions that we may find the three thousand four hundred million going even higher.
[Perry:] I... prefer not to speculate about that er at this stage, particularly in public session we are... tha that is the... current estimate of project cost. We are waiting for a new quotation from Eurofighter for their part of the programme erm but in advance of receiving it I'd not... rather not speculate as to which impact it might have on the project.
[speaker001:] I think we might come back to that Mr session and see if we can extract a little more that way. I is there anything you can tell us about the additional costs of er... er increased specifications, there have been some increases as well minor reductions. Is there any specific item you can spell out for us that additional costs. I'm not aware of Well any increase in specification... some, some of the programme has been re-orientated. I think I I can now understand Yes the the point er er that you're making Mr Trotter. W in the estimates will you have will have received, we have made provision for some additional costs that were not covered by the original quote, the new weapons for example, were not covered in the original quote so they will be covered in the new programme cost. That's in the three thousand four hundred figure. Yes But can we. to some degree but not all and... you know in in due course we will provide you with a full... breakdown of this, exactly what is in and what isn't in. I think there's only one other point which I'd I'd like to make and that concerns the the programme re-orientation and the cost implications of that er one aspect of programme re-orientation which we've been conscious of is the need to preserve the delivery dates of the first production standard aircraft to the Royal Air Force and Italian Air Force in the year two thousand. Now erm... when you work back from that date er all the various activities that industry have gotta go through... erm you discover that erm... the production investment... activities er... really need to start to some level at some very low level, er later this year. But er... the these production investment activities are associated really with production engineering, er very closely aligned with development and erm unless you can do those... between now and the end of nineteen ninety five, when we start the P I phase in nineteen ninety six... before you can really make any progress you would then have to do a further year and a half of production engineering so in the new quotations Eurofighter are making a case for what they term a development assurance phase, some advance production engineering work... starting later this year and going on until the end of ninety five but when we start P I in ninety six, we can start with a bang and make... fast progress. Yes thank you. I'll ask Michael Colgan now to take us... a bit further down a look at the costs.
[Michael:] Erm yes Mr Chairman.... Mr Gordon in your erm opening remarks you referred to the fact that erm following the programme re-orientation I think you words were that the full government are now capping their liabilities on the programme. Well now... at the outset only seventy three percent erm of the development programme was subject to maximum price. Do I now understand it that the whole programme is subject to maximum price?
[Gordon:] That is our aim and I'll invite Mr Perry to explain that a little further.
[Perry:] Yes as you say there there is a budgetary or pegged element in the original prices and we are, as part of the... amendment to the contract to reflect the... the revised programme er seeking to place the total of the price for the Eurofighter contract onto a maximum price basis so that there would be no... er areas which were not capped. On the Eurojet contract we are seeking to actually convert that to a fixed price at this stage because the programme is more advanced it is reasonable to do that er on the air frame contract... probably the uncertainty and the degree of risk... at this stage is too high to move to a fixed price at this point.
[speaker001:] Right, now am I right in saying that that in order to control erm costs... erm the elements covered by the maximum price were divided into thirty four packages, is it still thirty four packages? Yes. Erm and ho how many of those do you expect to have agreed as fixed prices at er this stage of of the development? I think er the original plan would have envisaged er a very high proportion of that work having been converted to a fixed price at this point in the programme because according to the original programme not only would the aircraft have flown but we would be entering production investment at this stage and we would there be be fairly confident about the er maturity of the design, however the programme has proceeded much more slowly... than originally planned and the amount of er the price that has been converted to a fixed price is indeed quite modest er we have in fact I think only converted eight of the price packages to a fixed price er basis so far. Eight. And it is unlikely in fact now that we we will convert... more until er probably nineteen ninety five er shortly before going into production investment. Erm now could you help me on some of the the terminology used... because I gather that six of the packages... have been or about to be erm... priced on the basis of a ascertained costs erm I I just wondered if if that was a sort of euphemism for for a cost plus. What is ascertained? Essentially it mean that er the work is is more or less complete and therefore we are pricing it on the basis of the actual out turn of costs. So it is... essentially a fixed price? Fixed. Fixed cost. Er well costs that are known. Yes right. All uncertainty has been removed now. There's one of the packages been priced on a forward basis, what does that mean That means that the work is not yet er complete er and therefore er we are pricing against an expectation of the likely out turn of cost. Right, well am I also right in thinking that as as a rule of thumb, fixed prices should be agreed before a third of the war, of the work is completed? That would be desirable. So erm... can you tell us what proportion of the work erm had been completed before prices were fixed erm for those packages that have been... an and also what proportion of the work has been completed on those packages yet to be priced. Yes well if we take for example er... probably the largest of the packages which we have priced converted to a fixed price basis so far which was... package number three, er the tooling for the development aircraft and roll equipment which is erm... er forty eight million pounds, that was priced in August nineteen ninety two when eighty percent of that work had been done. Right. Mr Colman if I might add... that re- orientation... has brought with it the need to change our pricing strategy... and therefore rather than going package by package right through the whole thirty four, we're actually trying initially on the engines to go in one bang to price everything on the engines and do it... in the next few months. Right. For the er we'd really like to do the same thing for the whole weapons system with Eurofighter also... but the the premium that eurofighter might demand to cover the risk. No. Their risk... might be more than we would wish to face up to right now. So we have put a marker in the ground and said we are not going to move forward in the production investment phase... until we are satisfied that we have a fixed price at that point so we are actually going to cap our liabilities for Eurofighter with a max price for the whole of the remainder of the programme... and then we will fix the price and hopefully get some... economies from fixing at that point in time before we move forward into the next phase. So unclear. Right Pricing the strategy on the packages that er... we have er mentioned is er now changing.
[Michael:] Right, now you you've already made it clear to us that about half the increase in development costs are due to increases in the costs of the... equipment. The that is so erm... how much in total and or proportionally was due to equipments themselves being... more expensive than expected and how much because the U K share of costs was higher.
[speaker001:] Erm... I s... don't think I can give you a precise answer to that question er off the cuff Mr Colgan, I think we'd have to let you have a note on those figures hmm... right, yeah but all these equipments would have been selected by by competition would they? Yes indeed And on a fixed price basis? Yes, yep fine... thank you. Yes just before we leave however the question of what occur in my mind how you're going to get from the present... position in what appears to be a cost plus basis as we go along... to a fixed cost basis... and presumably the programme and I in in, are running as it were, are running effectively on the cost plus basis Well. and that accounts of twenty six of the thirty four packages. I I don't wish... to, to quibble... but is actually a cost minus basis... industry is not being paid its full costs for this programme, they've been paid... a percentage less than the cost they actually incur. Depending upon the master. a very good piece of negotiation on your part... erm that er there must be a reason why industry's prepared to a lost leader. It's is not er er so much a lost leader, it was an incentive... negotiated into the contract for industry to make progress. They were, are paid at a certain percentage of their incurred costs well below what it has actually cost them, until they demonstrate an achievement at a particular milestone and then the percentage is increased... and er. lost leader. Er well y yes, they'll be running at a loss right through until we eventually fix the prices for the whole programme and er... hopefully the if they do it very efficiently we might make some profit. Well er thank you very much. ask, how many equipments have still to be selected? Erm... the answer is is very few... erm... the pilots N B C filter... the N B C ventilation supply pack, the I R decoy and flares and the chap munition... erm... those are the only things that have not yet been selected. There are three equipments that have been selected where the contracts have not actually yet been placed. And is part of the package i d d does the package er of the aircraft when it comes to be served include things like the simulator or is that something that... outside the contract and is bid for quite separately. Erm, the simulator... will be developed er for this aircraft starting at the same time as we enter the production investment phase. So our, our cost figures for the project will include the simulator but in the next phase of the programme. Currently we have no authority to develop the simulator. Right. Thank you very much. I'll ask John McGuillion now to have a look at the flight control system.
[John:] Thank you Mr Gordon erm... you stated I think in your opening, I think y your opening statement, can you confirm that the two year delay has in gaining the first flight has been in actually gaining the flight control system er certified for flight.
[speaker001:] Erm... the certification of the flight control system... is the critical path item and has been for some considerable time.
[John:] Yes would have been enough.
[speaker001:] Sorry.
[John:] Yes would have been enough.
[speaker001:] Yeah, sure yes. there have been other... reasons for delays er up until about a year ago. So what, can you outline the basic technical problem that you've been having with the flight control system? Well er I think as I mentioned at the outset, there's no fundamental... technical problem er a system operating... broadly in the same way er was designed an an and proved on the United Kingdom's experimental aircraft programme er six or seven years ago, er this... particular aircraft, the airfighter two thousand,... will employ a rather more... er... extensive capability in its flight control system. It's not to interface with more systems, there's a lot more software in it... and er... therefore... the companies concerned have got a lot more work to do. I think it's true to say that the design responsible company, Deutsch Aerospace... erm has discovered that er... there's a lot more software in this system than they had originally imagined and the, their sub contractors of course, they've had to... er write various parts of that for them and erm... putting together the four elements of the programme... has been a lot more complex than anyone imagined. So it's a combination of those factors, if you like, management... difficulties, underestimation of the basic task... er one or two... er hardware problems within the system as a whole.... All of those things have led to lead to this kind of delay. Let's go to hardware problems, one or two, what were they? Erm... the inertial measurement unit which is er a rather critical piece of equipment er in er a system of this nature... initially did not perform to the the full level of requirement that that we... we desire so you know, some further development had to be done on that before it... would match the system. If you get... a hardware problem of any kind here it actually inhibits you from completing the software. You can't verify software until you've got hardware that's capable of operating simultaneously with the software. The... that is the kind of knock on effect we experience. So... let's look at the er software, who set the specification, who specified the software? Erm the specification was written by Deutsch Aerospace. That's fine, erm... what sort I mean what are we, are we back in... back in the old problems we've had before with or is it written in something else? Er... it's written largely in high level language, yes. Alright that's fine. So... Deutsch Aerospace... specified it. Yes. And er G E C Marconi, Avionex... er... were responsible for... making sure that it worked within the hardware in the system. Er G E C Marconi's are the leader of a consortium, a four nation consortium of companies that are supplying the computer and are also contributing to the software. So there's four nations writing the software? Yes. Speaking different languages. Yes. [LAUGHTER] is this not [] a recipe for disaster? Er we have taken every possible precaution to make sure that it's not a recipe for disaster. But it but it's delayed the project by two years. Yes... erm... and er I think in the course of that we will have learned a lot of lessons... the... er that's not a facetious comment, it's true er the the first time you write er a software programme erm and any of you will will have experience of this, it takes a long time to get it right. Once you've done it once it actually relatively easy for you to... improve it an an and getting it better in the next iteration, erm that is exactly the situation you've got here. G E C, leader of the team, had done something like this before, not quite the same but something like it before, but their partners haven't so there's a training process to be, to be done. Hang on can I stop you. G E C were the leader of the team. Yes. And that's right, they did the software on the experimental aircraft programme. Yes. But the lead company was specifying it was er Deutsch Aerospace. Correct. Why, when G E C had all the... expertise to do this and Deutsch Aerospace frankly, does not have a great deal of background in this. Yes well, for the experimental aircraft programme British Aerospace specified what G E C had to do and er a a this time, if you like, Deutsch Aerospace has taken on the equivalent role that B A E had for the experimental aircraft programme... and er Deutsch Aerospace are not without experience in flight controls they have. They didn't say that an and but they in this particular area, remember this isn't fly by wire, this is fly by light. You're dealing with a lot more information... er and much more complex switching arrangements so... I think Deutsch Aerospace had any experience in that at all did they? They have been er working with the North American Rockwell company on the X thirty one programme. Which is comparable complexity... and er they have picked up considerable experience from that but, you know, I don't wish here in this committee to in any way challenge the er capabilities or the competence of erm, of Deutsch Aerospace to undertake I'm not this role. I'm not, I'm not doing that, what I'm challenging is the consortiums decision to award the contract to a company who had not been involved in that particular area as opposed to a company that had. Was this purely er the result of trying to keep the percentage share? Erm, yes... that is... more or less the case. So beca so because we keeping the percentage share, trying to keep the percentage share down, the aircraft... is two years late and two hundred million pounds more expensive. No... no... let me... please finish my original statement.... The initial allocation of system design responsibility was negotiated between the four aircraft companies, Deutsch Aerospace, British Aerospace, Carsa and Allenia and... against the background of an M O U which said we must share the technology on this project between the four nations and in a particular way which... ensures that each of the nations... has got access to all the high technology aspects of the project er therefore... the individual companies identified those areas of the project, were... they felt they either could lead best or wish to lead and for the United Kingdom British Aerospace erm... identified the avionics system integration as the major complex task that they would take responsibility for. Deutsch Aerospace... took the flight control system. Allenia the utility control system er Carsa,the communications system and so on. So there was that allocation of system design responsibility right at the outset and that determined who would write the specification for what. We then went a stage further and to share the technology established joint teams... for each of these major areas, so that er the specification while it was under Dasa's leadership, it was actually done by a joint team which involved expertise from British Aerospace and the other three... and er therefore at that time... the whole Eurofighter consortium was confident that they were making the best use of the available expertise across the four partner companies, each bringing to the table, their own so that they could go forward on a confident basis. Now er... sure the programme has been delayed for all the reasons I I've mentioned. One of the reasons er with the benefit of hindsight, er was that we underprovided test equipment... er as you you have mentioned we have software being written in four nations... and er it's got to be assembled, somewhere. Each of those four nations er really ought to test the software pretty thoroughly before they hand it over... but because er we couldn't afford... four lots of test equipment... we said right, ship your software out, in... tested to only a modest level and it'll all be tested centrally in the Deutsch Aerospace facility. Now that has led to many iterations in the software design and development as the programme has rolled forward because every time you find a mistake, it's gotta go back along the whole test route. For the future of course, we have now... erm negotiated with Eurofighter a rather better arrangement, they're setting up a joint team, they're trying to do all the work in one place and they really are now making a lot of progress. So I think the the Eurofighter team has learned from the mistakes that were made originally in the allocation of the work and the way in which it was handled and they are now putting it right. I'm sorry that it's taken so long. That has been the main probem problem with the delay, can you... confirm that erm... assuming the the software is er... is actually rated flight safe er that there are other stages yet, we've still got to integrate the weapons systems, sensors and everything else. So that's all got to happen and can we expect that the improvements that have been made now to the syst to the management of this process... will not... give rise to the same delays that occurred in getting this system flight safe. Erm... I am confident that Eurofighter are grasping the thorny problem now in a very businesslike way and er are making... the individual partner companies fully accountable for the systems for which they have design responsibility and this again is a aspect of the renegotiation of the contract which we think is very important and we're determined that er... this will happen. And who's bearing the cost of the delay, the two hundred million? Er, for the most part, industry,... er we have refused to pay... additional costs at the government level which arise as a result of the slip er... induced by industry's own er causes. Could we move on to the constant frequency generator problems... er how much do by this? Erm... the constant frequency generator... is not actually delaying the first flight, the, the first aircraft will not have a constant frequency generator on board it. We will introduce the constant frequency generator at prototype number four. Er, the... this generator er ran into some development difficulties... er a while ago and er Eurofighter... chose, say I say, a a standby or an alternative generator which is suitable for the first three prototypes and er again the cost of that particular delay will fall to industry. That's fine. You've told that in your written submission, that supply for the infra-red er infra-red sa er search and track was changed, why? The original supplier er withdrew all his guarantees about the performance of the detector, or indeed his commitment to the delivery schedules, shortly after we had er... placed the development contract with the consortium... and er the consortium recognised that it could not live with that situation... and immediately set to work to find an alternative supplier. They have found one who is prepared to give the guarantees, who is delivering the detector, the detector that is on offer by er... sheer good fortune,i is actually now better than the one which erm the consortium had chosen originally. So the bankruptcy of the original supplier was nothing to do with the delay or actually going for another supplier? Wasn't, it wasn't that supplier than went bankrupt, that was another case. We have a, we have a second problem on the infra-red search and track consortium that one of the... team members has erm unfortunately hit some financial problems. Have these six specifications for the defences aid subsystems been relaxed? No. Thank you. coming back to the the I R S T supplier. Who does the checking out on the central... people who we may place contracts with? Erm... the... selection er er of er suppliers for the infra-red search and track... w that was... performed in the first instance by Eurofighter and the procurement organisations are the four Eurofighter partner companies make the checks on the potential suppliers in accordance with a schedule which we, the four governments, have provided to them. So they're carrying out the checks initially on the... the capabilities and the financial soundness of the, of the... proposed supplier. The this problem with the detector, it's another level of subcontracting down... and er... if you you're buying a piece of equipment of this kind from a... a consortium... er essentially you can't dictate to him precisely who he's going to use to supply the components for that system and er it is... the problem came to the notice of officials when the consortium came forward and and said look, we we've got these terms in our contract er concerning... detection range and so on and er we may not be able to meet those, er so we questioned the reasons and... then of course they revealed that they were having problems with the supplier. Er, they were immediately told to go away and put that right and they chose a different supplier. Erm, thank you. Can we now move on, have a look at the production phase last weeks. Yes... er on the production phase, can I ask a very general question... erm are you satisfied every... one of the participants is now totally locked in. Sorry, every one of the? Are the participants totally locked in to the... the production of er... Eurofighter? Erm,... we have er frequent conversations with the other governments at an official level and all the information that we have... erm is that the four governments are contending to proceed with the... D I and the production phases in the same time scale that I have quoted to the committee today. They last gave that assurance at the Secretary of State level on the tenth of December ninety two... and that was a clear assurance given at that time, that each government has a firm intention to proceed with the next phase of the programme. And, to the best of our knowledge, that is still valid though er of course to answer the second part of your question, are they fully locked in. None of us are lock in to this P I and production phases, we will not be locked in until we sign the memorandum of understanding for those phases and that is... scheduled for nineteen ninety five. Because er each of the governments er has the domestic political problem and er... each government, including our own, is not guaranteed to survive until... until the final production stage. Yes Er, so do you you, at a... civil service level, as you you are reasonably satisfied all is being done to guarantee we reach the production stage. Yes I am satisfied. On on er on production erm before the costs reductions had been identified, industry had said that the cost of production would actually increase, could I ask by how much it was said it would increase? Er, yes I will invite Mr Perry to address the question of cost.
[Perry:] I... think that erm the actual position er assured was that... industry gave us a quotation in erm April nineteen ninety two which actually was somewhat higher than we'd anticipated, but I'm not sure that industry reyu viewed it as an increase because it was probably the first time they had formally quoted a price. Er, however erm... because of the concern about er the overall cost of the programme and the production cost... in nineteen ninety two, we required er the companies to undertake studies into ways of reducing the programme cost and it was as a result of those studies, that they came up with a list of potential savings er which in the U K case er could knock fourteen percent off... the price that they had quoted in April ninety two.
[speaker001:] W was the increase er entirely offset by the cost reductions?
[Perry:] Erm... I I think it is true to say that the, the cost er reduction which they offered brought the price back within... what we regarded as the affordability within our defence programme, er the level of affordability.
[speaker001:] Okay, and one of the cost saving measures er is a more efficient work share ar arrangement, can you give some examples?
[Perry:] Well in in general er the original work plan had divided up the production work to share out the technology and... this meant that components were being shipped around more than actually they they needed to be or that was economic and it was found that there was the potential to concentrate manufacturers sub-assemblies for each of the major components of the aircraft and subsequently assemble the major components in one country rather than several. For instance, components of the wings were being shipped around between countries, which clearly was not economic.
[speaker001:] So wh what what changes are being planned then for the er production of the wings? Perhaps I can pick that one up. understand there's some overlap between the U K and Spain on er on that. There, there is... er certainly in the development... batch aircraft, er an overlap there... er and the three companies... were involved in the manufacture of the wings. Now there are only two wings on the aircraft and clearly that is not very efficient. [LAUGHTER] So we suggested that for the production phase it might be better if one company was to build one wing and the other company the other... er and that's. the third wing. Well yes er, we hadn't thought of that one Mr but maybe we should... do that. Er, so i it's er changes of that kind that have been looked at because if you move production work out of one nation into the other to get a nice rationalised allocation of work, you build this wing, you build that wing and so on, you then have got to do something with the minor components to get back to you original erm... work share allocation and percentage times. Now we won't know what that work share allocation in percentage terms is, until each nation makes its commitment in nineteen ninety five, to a production buy... and that is the time when we will finalised the details of this work share transfer plan. What about the radar, I understand er it takes three hundred days to produce and a hundred days... er is believed to be taken up in travelling from... one site to another. Yeah, that er little anecdote I I've heard mentioned previously, er the... the ray dome... erm... is erm er currently in the course of development and of course the the four nations each wish to participate in this interesting piece of technology. So the consortium that was doing the development arranged the work between themselves in a way which they... themselves considered to be efficient. As it's turned out, it's not efficient because the the ray dome spent a tremendous amount of time moving from one country to the other, there's no doubt about that... and before production we would want to see that particular nonsense removed and the whole thing made a lot more efficient, but for one or two development batch ray domes then you know, they'll just have to learn from that lesson. Savings were also intended from what has been described as other productivity improvements. Can you... amplify on that please? Erm... I I think it's difficult to quote examples off the cuff here... er the... er British Aerospace for example, I know that erm... er the company has planned to introduce cellular manufacturing techniques for some components which will reduce the number of man hours that are devoted to the manufacture of that item an and given a level of throughput will do the job a lot more efficiently. That's the the only example I can... recall off the top of my head. British Aerospace moves completely to Germany... er... a a third savings measure erm will be er from economies in logistics support, can you perhaps Yes. comment on that. Er, yes in the studies in nineteen ninety two er Eurofighter suggested that there could be reductions in the holdings of spares, rolled equipment and support items as a result of the more accurate forecasting which we expect to emerge from the logistics support analysis. So if group captain White has already given you an example... of the reduction we've made in in some of our... er... scalings of those equipment, er it was also suggested by the contractors that economies could be achieved by reducing the number of bases, the extent to which all squadrons should be fully multi role equipped and by contractualising more of the second and third line support, erm, we and the other partners are still considering these proposals in detail er and haven't actually taken decisions yet but there are certainly some possibilities in that area for er economies against the original cost estimate. Yes and the savings are planned er from keener equipment pricing, er how, can you explain, how can this be achieved. Well Will it be through greater competition? The quotations which Eurofighter provided er in nineteen ninety two were based on the equipment option prices which are included in each of the equipment development contracts. Er, they believe er that it will be possible to improve on those prices in negotiation with the suppliers. Perhaps I I might amplify that a little. In that erm just as we've discussed the allocation of work on the airframe between the four nations on m most pieces of equipment there is a an allocation between the four nations and er in in many cases... a consortium with the same members has actually won the competitions on five or six different pieces of equipment. So we're trying to encourage the equipment suppliers now to look again at what they have won on business for Eurofighter and perhaps allocate the work between themselves a lot more efficiently so that instead of each one of the four members building a given percentage of the five items, they say right we'll take this one, all of it and we'll build all of it, you take that one, all of it and build that one and so on an and in that way we might be able to er... er improve considerably on the... costs of production. Thank you er ooh. When one goes for a major adventure like tornado you hope that most of the difficulties are are ironed out, clearly... they're not, another set of difficulties emerges. With the benefit of hindsight er could the tornado programme have been made more... efficient with the lessons that you've learnt so far, er from er Eurofighter an and secondly, perhaps more... difficult, er the lessons you have learned from tornado and certainly from the current project, could they be transferred to other complicated collaborative er project, programmes like cobra and? Erm, well I I couldn't speak for the latter two programmes cos I don't know enough about the arrangements there but I have got a a fair amount of knowledge on both tornado and Eurofighter. The tornado aircraft was developed... under a cost plus environment... er contracting environment and... erm at the time... that was actually the most efficient an and probably the only practical way to do because the the risks inherent in having three partner companies that don't know how the others work, getting together to build a single aircraft, were, were extremely high. So we proceeded on a cost plus basis, also... the... cost plus environment... actually... brings the partners together because if there are three of us working on a cost plus contract and I have a problem, my two partners rush to help me because clearly... there's some more profit for them, erm... if... the only difficulty with cost plus contract of course is that unless you have a a real... ceiling on the total er costs that you're going to pay, it may keep on rising far higher than you'd ever imagined. Now on tornado the development costs erm I know, exceeded the original expectation by quite a considerable margin but the production costs were much less and overall, taking the two... lots together, it turned out to be a good buy. Er, so the lesson we learned from tornado was that we want to try and cap our financial liabilities for the project... for the development of it, at a much earlier stage and er drive as tough a commercial bargain as we possibly can. So we embarked on a different commercial strategy, trying to implement that that lesson. It has had... considerable benefits, it's had one or two... drawbacks... and er I think the biggest lesson that we have probably learned so far from the Eurofighter programme, is that we have to be very careful when we make work sharing agreements in future, that er we don't... try to drive the work sharing requirement down to too low a level. If we can keep it in broad percentage terms of the total work at the project level, fine, that can be done, efficiently and effectively. But if you say we must share every piece of equipment in those ratios, then you do create management difficulties and the potential for delay... and and indeed... that can in turn add to costs. So those are the two lessons. Thank you Sir Nicholas.
[Nicholas:] [clears throat] Er, I'm I'm very concerned about... the question of these costs.... Er, obviously any Ministry of Defence... er er contract is a soft touch as regarded by the supplier.... You have limited er suppliers who you choose... er... having heard the figures that you've given us today... erm i it seems to me that there is very little control of that expenditure. Now, when you are entering into a contract, and I wonder if you could send this to the to the chairman... er your letter... er of... erm contract because to have a contract which can be varied in its cost always upwards... is a very dangerous contract and I would interested to see... the contract that is supplied which does not control price.
[Gordon:] Erm... obviously we can er... prepare a note for the committee setting out the main features in what I would call our commercial strategy. Erm I would hesitate before offering the chairman or the committee the contract, er the contract for Eurofighter actually... runs to thirty four books and it stands about that high and er.
[speaker001:] [LAUGHTER]
[Nicholas:] Well just send the financial section.
[Gordon:] And that is probably about... thirty percent of it.... But erm it is a subject which is er... investigated every year by five teams of auditors. We have a team from each of the four nations and we have a team from NATO.
[Nicholas:] Erm Mr Gordon, given the fact that we are running a little short of time I think if you could give us a note on your contractual arrangements then that will take this matter forward and we come back to you if necessary.
[Gordon:] I'd be pleased to do so Mr Nicholas.
[Nicholas:] Thank you very much erm I have one last question on this item... er that I've now lost... oh yes it was a... erm Mr Perry, you mentioned under the logistics savings that were possible er the potential cut back in R A F bases. I think we've only got four which er this aircraft can fly or for the moment the three tornado F three bases and the one jaguar base... er is the ministry says they're looking at cutting back on those?
[speaker001:] I think er we're in danger of perhaps getting a misunderstanding going here. What we have been talking about in economies and logistics support is reducing the amount of second line... base facilities for this aeroplane. How ever many bases the Royal Air Force decides to operate from is a decision which the Royal Air Force can take in due course. But erm the... logistics costs are made up from the costs of... procuring spares and support equipment largely and er... for an aircraft such as this, the amount of equipment required to operate at first line is very low indeed.... To maintain the equipment at second line requires quite extensive test equipment and facilities. However in this aircraft we have specified a very high degree of re reliability... and if you look at the total number of occurrences for each piece of equipment that are going to require maintenance, it's so low that it doesn't justify the provision of maintenance facilities on every base. So what has been suggested is that er we examine the possibility of centralising the second line facilities that are normally provided on every base and only do that at perhaps two bases. I see thank you, yes that's very helpful that clarifies the position on that... and finally I'll ask Michael Colgan to take us into the question of the management systems for the contract.
[Michael:] Yes er Mr Chairman we have, at the moment, two intergovernmental management agencies involved in the same building in. First of all we've got N A M A managing the tri-national tornado product project and then we've got N E F M A er handing the er Eurofighter, same notions as the division of Spain. You were talking earlier about er applying the lessons learned here from the tornado programme to Eurofighter, surely the best way of doing so is to involve the same people, they're in the same building. What are the difficulties about amalgamating these two management agencies and just having the one. It might also... assist in work share and offset because perhaps if... things were getting out of balance on Eurofighter you could actually use the tornado pruject, project and get a greater balance. Far more flexibility surely.
[speaker001:] Erm... well could I deal with the management agency question first an an then perhaps I'll invite Mr Perry to speak on the difficulties in trying to equalise work share of one project with trying to counterbalance on another.... The... erm management agency that was set up for tornado was structured and manned for that specific task. When we started the Eurofighter programme, we did look at the possibility of expanding N A M A so that it could also conduct the management of the the Eurofighter project.... erm... One of our buyers, Spain, er... was not in favour of that solution... because they were not a member of the tornado team and they did not want to see some kind of old boys club er running this project which was very important to them. So it was agreed, right in the beginning... that we would establish a separate... agency to manage the Eurofighter two thousand programme, but that we would look at the possibility of bringing these two agencies together... at... as early as possible time and the most expedient way for all concerned. So we have followed that plan and in nineteen ninety we conducted a study as to exactly how this could be done, a er an integrated agency management structure was devised and a plan was er produced which would have resulted in the two agencies merging... at the beginning of this year at the start of the what was then planned the D I phase.... Er unfortunately the the problems... which occurred in nineteen ninety two with the threat of German withdrawals from the Eurofighter two thousand project put a complete stop on the plans to merge the two agencies. Is it still intended it happen. Yes it is. Before the production phase? It is intended and er all four sets of government officials are resolved to integrate the two agencies in time for the commencement of the P I production phases. So that we will then be operating with a single agency covering both projects. And on the work share. Work share for I think that... the idea of offsetting imbalances on on one project er... with transfer the work in other is certainly very interesting but of course as far as the erm... tornado programme is concerned I think it it is now really far too late because production is over apart from the the second Saudi Arabian order and we are really only working on the manufacture of spares and... given that the existing suppliers are all tooled up for those and indeed her are way down the learning curve having produced vast quantities of them, it really wouldn't be economic to transfer any of that work now I don't think. Thank you. Thank you Michael. I think that er... what we will do now gentlemen is go into closed session so I will suspend the sitting er while the present public leave us... er so the sitting is now.