WEDNESDAY 14 FEBRUARY 2001

MR STEPHEN HILL, MR DAVID RUTHERFORD, MR BERNARD GALTON, MR JOHN OUGHTON AND MR NICK EVANS

  60. In your assessment what does DARA provide for such an arrangement as opposed to private sector industry?
  (Mr Hill) DARA provides a competitive alternative. In some areas DARA has the only capability. On some transmission systems there is no alternative in the industry available. If you look, for instance, at the Chinook transmission system we have the best transmission test facility in the world now at Almondbank, £12.5 million of capital investment. The only other one that compares with that is Boeing's own in Philadelphia which is over 25 years old. We do have unique capabilities we can offer to the MoD and to wider customers in the European market-place.

  61. You mentioned earlier your relationship with British Aerospace. When we came to visit you last week you gave us this very interesting briefing about Project Whirlwind. Could you say a little bit about that and what your plans are there and how Project Whirlwind would fit in with the partnerships you have already got and how that would relate to those existing partnerships?
  (Mr Hill) Any organisation in business looks for competitive advantage and we have been traditionally a repair and overhaul agency only. Management of the supply chain is going to be crucial to business success for the DARA in the future and so what we are looking to do is to deliver a complete supply chain service from end to end, everything from collecting the component from front-line, repairing/overhauling it, accessing piece-part spares, testing, and then delivering it back. We are already doing that in part with our electronic components. Project Whirlwind will, jointly with industry, bring both entities together, the design authority together with the supply chain management organisation to manage the overall supply chain. The problem that we have in terms of the current state is that we have a whole range of disparate repair locations. We have repeated strip down and reassembly of components at times. We have high repair costs and inventory levels by holding inventory both within the DARA and other agencies and in industry with a measure of duplication there. We have a great deal of unnecessary waiting time, particularly waiting for technical support and also for spares. And spares provision has traditionally been the Achilles' heel of our organisation. What we aim with Whirlwind is to put together a lean, agile support chain to incentivise repair and overhaul organisations through repair contracts, and we are moving more and more towards spares inclusive operation where there are fewer agencies involved in that process. We have been looking at the entire supply chain and the average time for components to pass through that supply chain is 274 days at a time. If you look at the value added within that it is significantly less and the aim of Whirlwind is to significantly speed up the flow of components from unserviceable to serviceable through managing the supply chain more effectively.

  Mr Gapes: Thank you. I hope we will be able to get from the MoD the documentation we have requested which will make it easier for us to deal with this in our report.

  62. It is very interesting what you have had to say so far, Mr Hill, about where you feel the future is going. If I may, I would like to concentrate on four or five questions relating to future expectations, in particular surrounding the Eurofighter and your participation in that. We have been led to believe that approximately 6% of the repair work on Eurofighter will be allocated directly to you. How does this compare with arrangements you currently have in place for other aircraft types introduced in the relatively recent past?
  (Mr Hill) What I would like to do is ask Mr John Oughton to give the DLO perspective and then I will go into the detail following on from that.

  63. Would it be more helpful then if you heard the rest of the questions.
  (Mr Hill) Yes, indeed.

  64. The next point I would like to raise with you is the way in which the pre-allocation work has been allocated and what criteria has been applied, what sort of items are involved in it, and what was your role, if any, in selecting that work. The third question really relates to how does the MoD Eurofighter customer expect to save from the competed element of the maintenance of Eurofighter, ie the other 94%? Have you been in any way involved in realising what the potential savings would be putting that work out? How much of the competed work do you expect to win as an organisation? How much will you bid for? And the final question really relates to maintaining Eurofighter; is there scope for a collaborative arrangement with repair organisations similar to your own located in the other partner countries who are participants in Eurofighter, both in development and more importantly for the long term, those countries who will be operating Eurofighter?
  (Mr Oughton) Mr Hancock, perhaps, if I said a word or two about the general framework in which we have taken these decisions. Unlike the conventional approach to support, which would have been based either on significant reliance on our in-house capability at the DARA or direct support from the manufacturer, we did look at whether there was a third option available to us here, what we call a hybrid option, which would allow us to draw on the best of the support we can secure from the suppliers in industry and the best support we could secure from the DARA. We did look at those items where it was appropriate to make an allocation to the DARA, that is the 6% you are aware of. In forming that view the Chief of Defence Logistics, General Cowan, who is a member of the Equipment Approvals Committee, will have drawn heavily on two sources of advice in helping him to form that view, one would have been the integrated project team itself responsible for the Eurofighter within which, of course, are contained logistics specialists, whose primary function it is to support the project team in forming views on the support strategy. Secondly, on the DARA itself, and the Chief Executive in expressing an opinion on the role the DARA could play and the capabilities that DARA could offer in putting that support strategy together. There would have been full involvement and full discussion of the options before a decision was taken. The judgment that the customer has made here—again, it is a judgment that is made by the integrated project team—is that by allocating 94% of the support work to a competitive process we would expect to gain significant benefit. On a total support programme cost of something like £10 billion over that period we would be looking to secure benefits and make savings in line with the DLO's strategic goal, and well into double figures of percentage savings. Those will not be common and standard across the board, but overall that is the sort of benchmark we would expect to secure those improvements. We would expect, as part of that strategy, the DARA to play a significant role, doing so by winning work in competition rather than having it allocated. That has two benefits for us, the first benefit is that by assessing competitive prices—and DARA's prices are now constructed on a trading fund basis—we will have a much better understanding of the costs and we will be in a very much better position to make judgments on where the savings can be secured. Secondly, by having the choices open to us we can also assess who is best placed in terms of engineering capability to do the work. I will leave Mr Hill to make comments on what he expects to win through this competition.
  (Mr Hill) If you go back some years, Mr Hancock, we were traditionally allocated work on a work share arrangement. It was basically 50/50 between industry and the third line organisations. That has rapidly disappeared, and probably quite rightly, as people have sought better value for money. As DCDL has said, 6% of mission critical and contemporary technology work is what has been formally allocated to the DARA on off-aircraft components. There is no policy, yet, in terms of on-aircraft work, we are waiting for that decision to be made. As far as the balance of 94% is concerned it is our aim to shape the agency up as a trading fund to be truly competitive. We fully expect to get a minimum of 25% of Eurofighter off-aircraft work in that competitive process. We have a wing commander in the agency who is a full-time representative of the DARA in the Eurofighter integrated project team in Abbeywood. He very much looks after our interests day-by-day. We meet regularly with him in order to shape up our support strategy together with the IPT. Although this is a very different arena we are now moving into for Eurofighter we welcome the opportunity to be able to compete for business on a level playing field for the long-term.

  65. I just want to follow this up. I appreciate that the DARA and management are eager to be competitive and win a lot of these contracts, it is set at a low level, just 6%. Is one of the implications if they do not succeed against the competition that the Defence Logistics Organisation and the MoD would be prepared to let them go out of business?
  (Mr Oughton) Clearly in the business case—which led us to a decision that we should move to a trading fund status—we have constructed some assumptions on the degree to which the DARA can become more efficient. We have also made some assumptions on the degree to which the Defence Logistics Organisation can become more efficient. We have talked this morning exclusively, internally about the DARA and its expectations. It is very important for the Committee to look at the DARA as an integral part of the support capability we provide to our Armed Forces. The benefits we will secure in terms of reducing the costs will come partly from within the DARA and partly through the connection that Mr Hill was talking about, the end-to-end seamless approach to providing support. In a sense, we are all in this together to produce an end result. In answer to your question, Mr Cohen, we could not see the DARA fail independently. It still has to be seen as an integral part of the capability available to us. We will be in a much better position to understand the true cost being charged to us for the work being done in the DARA as a result of the trading fund status. That will allow us to take our decisions in a more informed way.

  66. A key concern is that in an emergency, if we have a wartime situation, then, clearly, we need an organisation that can be relied on, that can do the work of aircraft repair quickly and efficiently.
  (Mr Oughton) That is why we took the decision that we should move to trading fund status. We did not take a decision to privatise the DARA. We believe that at this stage of our development it is absolutely right that we should have that surge capability available to us within the Ministry of Defence. The DARA will be still be a part of Ministry of Defence after this.

  67. The design and the construction of Eurofighter was an international co-operation project. Is the repair and maintenance of Eurofighter lobbied on purely a national basis or is there international co-operation, with countries pooling their resources?
  (Mr Hill) There is certainly a measure of international co-operation, yes. There are very complex work share arrangements. That is why I am a little bit reticent to try to roll them out because I am not an expert in this area. It is very much the DPA who is leading on that one. I am aware that over the years very complex work share arrangements have been worked through on the Eurofighter project. There will be a major centre of excellence within the four partner nations. The detail I really would defer to the DPA.
  (Mr Oughton) I think it is fair to say, Mr Viggers, that the support strategy that we have constructed, the hybrid strategy that I described earlier, is very much a departure from the conventional way in which we would have supported the aircraft. We are clearly in discussion, through the integrated project team, with our partners to explain to them and show them our thinking on what we believe to be the best development in support strategy in the current environment. We wish to seek agreement as far as we could on common support. It is very much a question for the integrated project team to pursue with its partners.

  Mr Viggers: The point of my question was that you are in a position to bid for repairing other nations' Eurofighters. I understand that is the case.

  68. I would like to ask some questions on pay and grading. I know there have been a number of anomalies, you explained some of those when we visited last week. I know you have been making some reforms to pay and grading in the run up to going to a trading fund. Were you not able to make those anyway under Treasury rules or do you have special dispensation to do them?
  (Mr Hill) No. We have to have formal pay and grading delegations from the MoD centre to be able to negotiate pay and conditions for our people in the agency that are appropriate to our business. What I would like to do is hand over to somebody who is very expert in this area, that is Bernard Galton, and he will be able to take you through any of the detail.
  (Mr Galton) Some years ago Treasury delegated to the MoD collective bargaining for civilians, so they are the custodian of that. Apart from the DARA, Met Office, and Hydrographic Office that went to trading fund there are very few areas of the Ministry of Defence that are undertaking bargaining in specific bargaining units. We have had to seek delegation for that, which we did, and we got that for our industrial staff on 1st April last year. We are very keen to have non-industrial delegations as well. We wanted to bring all of the civilian staff together so that we could develop a holistic approach to our pay, grading and working practices strategy. We were not able to do that. The MoD said that it should come at the same time as the trading fund. We are now going through the business process for delegation for our non-industrial staff on 1st April this year. What we did with our civilian staff—we launched it at our trade union conference in July 1999—is we set up 30 working groups, these are mixtures of managers and our own trade union representatives, both industrial and non-industrial, even though we did not have the delegation, to actually look at whole areas of pay, grading, working practices in terms of what we wanted to do for the longer term benefit of the agency. We looked at what was good in the MoD system. There are some very good things in there. We looked at what we really wanted to change and what things we wanted to design specifically for us. It was a very, very successful project. The national officers were not involved at this stage, it was all our own people. It culminated last summer when we reached agreement with the national office of trade unions and other members of the negotiating committee for a settlement for the industrial staff. We reached that in record time, we only had a couple of meetings. The sort of things we did was that we consolidated a number of old bonus schemes, bearing in mind we brought in people from what was the RAF MGDA Agency and the Naval Support Command NARO, that had been set up over many years. We consolidated those at the highest rate. We took out a load of old allowances that some people had been claiming for many, many years. People physically had to claim these allowances and it could not be seen, therefore, as part of their stable income. That was important to us, to put our industrialists on a stable income, it would help them get mortgages a lot easier, it would help them plan their lives, it would also help us to plan our pay bill a lot easier as well. We did that. The staff will be moving on to monthly pay as from next month, it will be exactly the same as our non-industrial staff. We obviously have to go very carefully within our remit from the Treasury. We could not throw money at this problem. There is a certain flexibility we could use in terms of the wider use of recruitment and retention allowance, where it has only been used on particular pockets before. So that was on the pay side and we made some quite significant changes. In terms of grading, we have stripped out the old supervisory grades. To some people that was very painful because that was their status, they had worked up to that, and to actually see that being taken away to move towards a new structure is obviously painful for people and we had to deal with that very carefully. What we want to end up with and what we are moving towards are self directed teams so that all of the people within those teams are paid in the same way. Although they bring different skills and experiences to that team we will use all their variety of skills to improve their performance and ultimately the output to the customer. That is a major change in terms of the grading. When we have been round doing our mass briefings, we have had people saying, "I am on the shop floor and there are five layers between me and junior managers." To take that out speeds up communication, it improves clarity, and we are going through the process in terms of that major change and it is settling down very well. On working practices it is a case of needing more flexibility. In terms of giving our staff better pay, better conditions, obviously we want something in return, so it is the flexibility, the removal of old demarcations, the introduction of self-supervision and the self-directed teams where they really are going to take far more control of their own destiny and have an involvement in shaping the future of the Agency.

  69. I appreciate that answer. Clearly it indicates that a lot of reform was needed in this area. What more do you propose to do when you have got the trading fund status in pay and grading? And another point on this, clearly you are not going down the road of privatisation because of what was said earlier—the need to keep the research role and other reasons as well—but would privatisation have given you even more flexibility in terms of pay and are those some of things we should be taking into account in considering trading funds generally?
  (Mr Hill) If I could take this at the top level and then hand over to Bernard again. What we are aiming to do is to look at best practice in the commercial sector and particularly in the aerospace business and to benchmark our systems against those and we will, as we evolve as a trading fund, be looking at performance related rewards as a key issue. But it is absolutely crucial that we move to a single bargaining unit within the Agency and take out the artificiality that we have lived with for many years of industrials and non-industrials having a completely separate system. That is no longer appropriate, and particularly inappropriate as we move into becoming a trading fund. It is our aim from 1st April to progressively migrate towards a single status workforce so that everybody has an opportunity to be able to target any career opportunity from the shop floor to the chief executive post.
  (Mr Galton) What we can do from April with non-industrial delegations is it will give us the ability to tackle specific issues that we have got within the Agency. An MoD-wide pay deal tends to be fairly broad brush, there is a standard increase across the board, and clearly that cannot tackle problems that exist within the DARA. For example, we have got a group of staff called TTOs. We are the major employer of TTOs within the MoD. It is only Henlow that employs a few as well.

  70. What is a TTO?
  (Mr Galton) It is a telecommunications technical officer. We have got quite a few at Sealand. Their conditions are different from the professional technical officers who are another group. We need to tackle that in terms of the differentials that exist, many of them very, very specialised. We need them desperately, there is a lot of competition in the market-place for them so we need to be able to target our own pay system to deal with those sort of issues. That is just one example. We have got a problem in terms of the interface between the industrials and non-industrials over many, many years of them having quite separate pay agreements within the MoD. Again we have got to tackle that in order to achieve single status workforce and achieve the harmonisation. We want to end up with DARA employees. We do not want first and second class citizens within the Agency. So we must tackle that and certainly at the interface we have a bulge that we need to correct. You questioned whether or not we would have the same sort of freedoms as a commercial company. We have got the constraint clearly of working within public sector pay but then commercial companies have the constraint of working within their own profitability and in terms of their shareholders. So I think that we have similar constraints but for very different reasons. What we want to try and do is to pay people a market rate for the job. We will not ever be able to be the best payers in the business but if we can move up towards that that will improve our recruitment and retention which means our costs will be reduced. It means that there will be a long-term return on money invested in training. I think overall that will be beneficial but it is working with our trade unions, with our staff to develop jointly something which is going to be good for them and good for us.

  71. We were very impressed with the training we have seen. We were delighted with your apprenticeships especially your apprenticeships for people who were in other careers before. I was particularly pleased to see a former mine engineer who was taking an apprenticeship but there was an incredible anomaly there when these apprentices were getting to their final year that they were getting paid literally the same as those who were doing the training. It is the trainers where the key quality is in this. There was this anomaly where they were not getting proper wages. Is this the sort of example you are saying you will be able to address?
  (Mr Galton) It is an excellent example of the sort of thing we want to address. Apprentices are industrials and therefore we were able to address their pay and conditions in the year 2000 so that when they come out of their training after six months they go on to the craft rate. We were not able to address the pay of the trainers and what we want to do is pay a rate for qualified and experienced trainers and, clearly, if they are earning less than their trainees then we have a problem and we do need to address that. We are well aware of that problem and will be looking at this straightaway for this year. We are not going to be able to achieve everything in year one. It is going to take two, three, four years, maybe longer in some areas, to get our long-term strategy in place. There is quite a lot of things we can do this year and for the staff to see the benefits of delegations you have got to come up with quick wins in terms of them seeing the benefits in their pocket straightaway.

  72. Can I follow up with my question because it is also about youth employment and training and apprenticeships. We did see some excellent very impressive work there, and we would very much like to see it expanded. Is it likely to be expanded when you take trading fund status? Is there scope for that?
  (Mr Hill) Indeed we are absolutely committed and yesterday we had a corporate governance group with the top 50 people in the Agency to develop the vision for the future and there was an absolute commitment within that group to us becoming a learning organisation and investing in people's careers for life. That is something we have not been particularly clever at in the past. We have tended to give the industrial element of the workforce just time on type to learn about aircraft or particular equipments; we have not developed their career opportunities as well as we might. We are committed to doing that as a successful trading fund. We are investing more in training and development now than we have ever done before in the separate agencies and that will be very much the flavour for the future. There is not a single person in the Agency that will not go through some form of comprehensive training this year. So lifelong learning is absolutely key. We are even going further back than that. We formed a Saturday Club where we have young people from the local area coming on Saturdays to learn about aerospace so that they are able to make a decision as to whether they want to come into a full career with us or generally in aerospace. On from there to apprentices, management training, right to top level training for the board which we have done in the past year.
  (Mr Galton) In 1998 the constituent part of what is now the DARA had 100 apprentices. We have increased those on year-on-year, in 2001 it will be 155. We are limited however, by the capacity in the training centres. There are only so many you can bring through in terms of the trainer/trainee ratio. We have had a very in-depth look at the way we deliver our training, without reducing the quality, to ensure that we meet the full standards based training for the MoD modern apprenticeship. What we have been able to do, by making better use of Barry College in St Athan, by having two intakes per year we can double that capacity from 60 apprentices to 120 apprentices. We have an ageing work force. We have a civilianisation programme. There will be a continuing need for skilled young people. The ability to bring in 120 apprentices, which is available in August, is going to be extremely beneficial to the long-term viability of the area and very beneficial to us in terms of having young people. The Saturday Club is fantastic, I am very proud of it. We started it last year and this is the second year. We have had more applicants from youngsters than we could take. We have six young women as well, we are trying very hard to improve the number of women coming into engineering. One of my trainers now is sponsored full-time by the local education authority. He goes out into schools talking to year nine and year ten pupils. We have designed part of the curriculum for their technology, to come in to St Athans and do something practical in St Athans which they can take back to school and which will form part of their GCSE programme. It is combining work and school. We have more work to do on that. We have been doing this with British Airways, GE and the other British Aerospace employers in the area. We are very proud of it.

  Mr Hood: We were very impressed. We would like to see it spread in other parts of the country.

  73. I think it is clear from the last exchanges that there was much that we were very impressed with, particularly the apprenticeship schemes, and there were many people that we were very impressed with in the people we met. We are very grateful for that opportunity. What we are here to do is to really get to the bottom of what both the DARA, the MoD, Members of Parliament, whoever are the bosses, are going to get out of converting to a trading fund. We have to know and be sure that this is going to be something worthwhile. Much of what you talked about is pre trading fund. You might argue, "We are getting ourselves ready", but we have to say to you, "If all this could be done without that, what are we doing? Where are we going?" We need to explore with you in much greater detail things like commercial freedom. You mentioned it several times, you talked about it in terms of investment. What does that mean? What does commercial freedom mean to the DARA and what does it mean to the MoD? What are they going to get out of it?
  (Mr Hill) In terms of other trading funds in the Ministry of Defence and elsewhere in government that we have visited there is absolutely no question that the entire work force takes a greater ownership of the business, they have greater control over their destiny and in terms of the business that they can target, that they can capture and, therefore, their long-term prosperity within that organisation far more than on-Vote agency. The other issue is the ability to invest profits, to be able to make a profit out of the business and then to invest that into the business for the future. That has been one of the most vexed issues over the years that agencies have had to face. As with votes, you end up having to bid year-on-year, particularly for capital projects. It is one of the reasons—there are many others, that can I allude to, if you want to go into detail—as to why St Athan's has got into the dilapidated state that it has. In terms of commercial freedoms an on-Vote agency would not be able to enter into a joint venture opportunity with a company where you would bring the skills of both parties together to create something that is greater than the single entities in terms of business, whereas with trading funds we can. We will also be able to get into a wider market place, which has the benefit for the MoD and the taxpayer in that the more work we can bring into the agency the more our overheads go down, the more competitive we will become. There are a number of markets that we can get into, I believe, more freely as a trading fund than we can on the vote. What I think is important as a trading fund is to get the buy-in from the work force so that they take greater ownership of the business, so that collectively we make a success of it.
  (Mr Galton) We have worked very hard to get the staff, to buy into the vision and build the corporate identity. If you look at the history of both NARO and the MGDA they went through competing for quality and they were going in different directions. You have to bring them together and say, "This is the DARA, this is our future you have a really key role to play in this". If we are successful then as a trading fund we are able to use some of those profits in terms of improved pay and remuneration. We can look at team based pay, linking bonuses in terms of performance against KPIs, and corporate bonuses. If know that some trading funds have that, certainly in the last one I worked in. In that way you can directly link the input that the individuals have made to the output that they have produced and reward them for that success. That help enormously.

  74. This is all good management-speak about getting people to buy in. I think it is fair to say that there were people who work in there that have some concerns that they had not really caught the ethos of what you are trying to achieve. I am going to ask some specific questions about what freedom you will have. Will you be free to set your own prices?
  (Mr Hill) In terms of our prices we will have to work within Treasury guidelines. We will work to Specialist Procurement Services' scrutiny. We will have to, just like industry, work within the QMAC system (the Questionnaire Methodology for the Allocation of Costs). We will be no different from industry in that respect. I will ask DCDL to come in and give the DLO perspective because there is an important issue for both parties in this respect.
  (Mr Oughton) Mrs Moffatt asked the question both ways round, both the benefits for the DARA and also the benefits for the MoD more widely. Perhaps, I should say that the decision to move the DARA to a trading fund is an essential component of our overall support strategy in creating the Defence Logistics Organisation. The reason for doing that is set out in the Defence Review White Paper in 1998, it was to provide us with the opportunity to secure greater rationalisation and greater synergy across diverse elements of our business. Why? Because we needed to find ways of generating the financial headroom in the Ministry of Defence budget in order to pay for the modernisation of our Armed Forces. The key priorities that were set out in the Defence Review in 1998 were investment in frontline capability, the new aircraft carriers, the new combat aircraft, and also dealing with some of the deficiencies which the Defence Review believed it had identified in our medical services provision, for example, and in some of the support and sustainability areas, meant that we needed to find a way of generating extra resources from within the Ministry's own budget in order to tackle those issues. The key first benefit for us was allowing us to invest in modernising defence across the board. That is why we took the decision to address the support issues pan-DLO. Secondly, in order to do that it was extremely important for us as we created the Defence Logistics Organisation to understand the true cost of running our support business. Under conventional cash accounting systems, which are now being replaced by resource accounting and budgeting, it was simply impossible to establish the true cost of ownership of any of our assets. Mr Hill has described the significant assets in terms of buildings and estate, plant, machinery held by the DARA. We had no concept of the real cost of any of those assets any more than we have across logistics activities as a whole. We needed to find a way of shining a spotlight on those costs. Thirdly, we needed to find a way of ensuring, as we developed smart acquisition, we could provide the introduction of equipment into service better, faster and cheaper. We carried that through into how we supported that equipment once it was in service. Ensuring we could provide better availability of our fighting capabilities to the frontline was, again, absolutely essential to the strategic defence review decision. As Mr Hill has explained, many of the techniques we are trying to develop not just in DARA but across the Logistics Organisation as a whole are concerned with faster turn round times, bearing down on the asset base, reducing the spares holding we have in our warehouses, being smarter and leaner in the sense that most large enterprises in the private sector would be to ensure that we are spending absolutely no more than is necessary on the support end of the business. That is where the DARA fits into the wider picture and that is how we will deal with support into the front-line.

  75. I thank you for that very clear explanation of what we hope to get out of it but we want to know that DARA is going to be protected as well as being out there and doing business and making sure everything is done faster and better; we need to know there is some protection. What proportion of the work will you be given?
  (Mr Oughton) Perhaps the best point we should make at the start of that response, Mrs Moffatt, is to say that the DARA, once it reaches trading fund status, will not stand entirely independently from the rest of the MoD. It will sit outside the Logistics Organisation and will be owned directly by the Minister, but as an indication of the commitment that the DLO is making to the success of the DARA, we will be making investments, we will be providing investment in addition to the investment DARA themselves are generating in order to ensure the success of the enterprise. We are not saying, "You are on your own in the DARA, you have to fight to win the business and it is an entirely free and open market-place." In order to ensure that over the first five- year period of the business plan—

  76. So it is time limited?
  (Mr Oughton)—Over the first five-year period of the business plan we have made some assumptions about allocation of work and investment in the business in order to assist the DARA to become competitive.

  77. You expect after that five-year period to be out there on your own?
  (Mr Hill) Yes indeed, we hope we will make the Agency competitive enough to be able to stand on our own feet in the market-place. A very important issue of our business case is that we have built in General Sam's 20% cost reductions in our prices so we will be offering reductions obviously in the latter years because early on we have got a lot of investment. The other key issue that is very important both on input and output is moving to a hard charging regime, which is an enormous discipline. There are many communicated costs on the Agency at the moment where we have absolutely no ownership and no control. By moving to a hard charging regime we are able to negotiate the services that we take into the Agency and therefore we will fix the prices more effectively.

  78. Let me take that a step further. So if you were allocated work from the MoD and you found it completely unproductive and a great strain on your organisation, would you be able to walk away from it?
  (Mr Hill) That would have to be a negotiation with the integrated project teams. There are certain key areas where DARA has a unique capability where there is no alternative in industry, but if you put a hard-nosed business case together you would not justify retaining that capability. Electronic fuel pumps at Sealand is an example where we have insufficient through-put and yet it is absolutely crucial to the front-line of the Royal Air Force that somebody does that work. Industry has moved on to new production and no longer has the capability. In that instance we would negotiate with the integrated project team and they would agree to an inward investment so that we shared the cost of establishing a capability.

  79. What controls are there on the returns to the MoD? You said "we will be able to reinvest" but, surely, the MoD is going to take some of the cash off you?
  (Mr Hill) We have to pay a dividend on any loans and on the equity that we have from the MoD just like any commercial organisation, but where we make profits over and above that, that can be reinvested in the business. If we were to make massive profits I am sure we would get some Treasury scrutiny. That will be monitored by SPS and internal audit organisations like the DIA.
  (Mr Oughton) Again it is important to explain that in common with the normal practice for trading funds we would expect to offer a dividend holiday to the trading fund agency for the first five years of its operations, so again that is part of the commitment we are offering to ensure a successful set-up of the trading fund in order to make sure it will operate successfully.