WEDNESDAY 14 FEBRUARY 2001

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

  80. Can you give us some figures on the amount of work you will promise to give DARA over the next few years?
  (Mr Oughton) In terms of value or in terms of percentages? It is 90% I am advised.
  (Mr Evans) It is 90% over the first three years. I do not have figures for what that means in pounds, shillings and pence.

  81. Could you drop us a note?
  (Mr Rutherford) We can give you the total turnover numbers over the first three years if that is helpful.
  (Mr Oughton) I think we should give you a note, Chairman.

  82. I have got a large group of questions here and we have still got some way to go so I am going to group the questions and you may want to give me comparatively short answers. DARA is obviously currently made up of civilians and Service personnel. The Service proportion is going to drop dramatically but will still remain as a small proportion. Why do you need to have some Servicemen in the picture and how much freedom do you have in determining the proportion of Servicemen to remain?
  (Mr Hill) The numbers of Service tradesmen in the agency is determined by Headquarters Strike Command and part of the crisis manning reinforcement Requirement that we have. If you go back ten years or longer into the Cold War scenario the front-line squadrons of the Royal Air Force in times of tension and war needed considerable reinforcement because of the war rates of effort. The world has moved on and I am sure you are aware we have moved towards rapid deployment forces and the requirement is to have people actually within the squadrons able to be deployed at any time. The requirement for reinforcement manpower within third-line organisations like ours is rapidly falling and over the next two to three years, although we do not have precise figures, we expect Strike Command to reduce the requirement within the Agency. It has already fallen within the past couple of years. We are expecting it to fall even further by April 2003. Because we have got to be competitive and there is an added cost associated with the holding of Servicemen within the Agency, we have agreed a military premium with Headquarters Strike Command and that is in the form of a look up table whereby they can have as many people as they want as long as they pay that delta difference between an MoD civilian and a Serviceman because if we were to go into Eurofighter competition with Service manpower costs (which are necessarily higher) we would not be competitive.

  83. You have answered a third question too very succinctly, thank you. You obviously inherited large numbers of uniformed staff who transferred to civilian life—and I was not privileged to be part of the team that came to see you—and I understand that you also recruit former RAF trained personnel. Is there a problem that you could hit a recruiting wall a few years out as the trained base of uniformed people with the rather specialist skills involved declines and that you may find you are unable to find enough people?
  (Mr Hill) That is a problem but at the moment it is a manageable problem and we are giving every facility to Servicemen who want to join the Agency who have got the skills we are looking for to transfer from blue uniform into civilian employment, so we are having a reasonable matching between the two at the moment. In the future, you are absolutely right, it could become more difficult, but we may have to trawl the net wider. To overcome that, as Bernard has said, we are now growing our own people faster. We are investing significantly more in apprentice training. We have virtually doubled it across all the sites in anticipation of there being gaps in future.

  84. This half impinges on an answer you have already given but I think it is worth asking the wider question nonetheless; to what extent does DARA serve a strategic role for the MoD—providing for example security of repair services in time of crisis? You mentioned a specific requirement to provide individuals to go off on a much more limited scale to support squadrons, but as an organisation how much surge capability do you have to have?
  (Mr Hill) There is nothing actually stated. The ability

  to surge is inherent in our size and our capability. We frequently put working parties out on to frontline units. With the Army at Wattisham we put teams in there to work on Lynx helicopters, we have people out on RAF bases to look at Puma helicopters and - Chinook. We have people out in Bosnia from the agency, MoD civilians, working in support there. We even had people during the Gulf conflict on the back of US aircraft carriers providing support. We have no difficulty whatsoever in providing that surge capability. We also have surge capability in conjunction with the IPTs, in which we can set priorities between us on what is important to them.

  85. What are IPTs?
  (Mr Hill) Integrated Project Teams. Last year during the Kosovo campaign we agreed with them changes in priorities and that was able to generate seven Tornado aircraft in the space of two weeks very rapidly, plus an additional tanker which went into operation within 12 days by us working around the clock.

  86. Some of these places you are talking about were war zones, but so far there has not been very much actual shooting affecting ground crews. Are you moving towards some sort of sponsored reserve arrangement or what? Presumably you cannot send civilians in if there is serious shooting going on?
  (Mr Hill) No, we cannot. What we can very successfully do is back-fill behind units in the United Kingdom that can then deploy their people forward. We can help in the generation of aircraft, either within the agency or on frontline units in the United Kingdom or in Germany at the moment. We have looked at sponsored reserves very seriously. We are very enthusiastic to take on sponsored reserve status where it is appropriate. There are a number of complexities associated with sponsored reserves, I am sure you are aware of, but yes, in principle we are very happy to hold them. We have a number of people in the agency who are already part of the reserve forces anyway, Royal Naval Reserves, the Territorial Army or whatever.

  87. That is not quite the same. You are looking at the sponsored reserves.
  (Mr Hill) My point there is to say we have people who are very committed to supporting the frontline.

  88. You mentioned the US putting people on to aircraft carriers, does the US insist on the DARA rather than the UK industry doing any work involving US manufactured aircraft and avionics? If there is any such ring-fenced work, ring-fenced for IPR reasons or whatever, would the move to a trading fund make any difference?
  (Mr Hill) There are no constraints as far as that is concerned. For the future we are working very closely with the joint strike fighter team out in Washington, as we are in Boeing and Lockheed-Martin in order to get into that future business opportunity. We have heard nothing in the dialogue we have had there, even on that sensitive weapon system, about any constraints.

  89. The IPR position for trading funds, because it is 100% government owned, is exactly the same.
  (Mr Hill) Yes.

  90. On pages 20 to 22 of you latest annual report you set out key performance indicators under half a dozen holdings. Who sets these, please?
  (Mr Hill) These are set by the DLO and the Ministerial Advisory Board. We are obviously in the unique position at the moment in having a Ministerial Advisory Board in advance of a trading fund. They are the people who ultimately agree to the key targets for the agency. They are also worked out very carefully with the DLO. They are also worked out in conjunction with the Cabinet Office and the framework team in the Ministry of Defence. As far as moving to a trading fund is concerned we have revised key targets, and those have additionally been agreed by the Treasury in the run up process.

  91. These revised targets, are these the revised indicators -
  (Mr Hill) Yes.

  92.—which strip out the cost for which you cannot accept responsibility?
  (Mr Hill) Yes. We will no longer be measured in terms of costs. As a trading fund we are measured on the return on capital employed, just like any commercial organisation that is mandated for any trading fund. If you look at the four key targets that we are going to have now as a trading fund, key target one is quality; key target two is financial return on capital employed; key target three is efficiency, which is a measure in the reduction in the unit production price, and that is on a basket of products that have been agreed by all parties, particularly the DLO, finally, key target four is based upon increases in commercial revenue. We have signed up to an increase in that over the five year period of our corporate plan.

  93. Even the revised targets are negotiated and artificial and are not exactly the same as the target of a commercial company which is floating freely on the market.
  (Mr Hill) I would not accept they are entirely artificial. Anybody in the aerospace business, because of air worthiness considerations, needs to be measured in terms of quality. We are no different from the civil aviation sector in that respect. As far as the financial measure, it is very much return on capital employed, which, of course, is common to industry as well as to trading funds.

  94. You are stopping short of the targets that a full commercial company would set, which would be profitability or dividend paid on capital employed.
  (Mr Hill) Yes.
  (Mr Rutherford) Not quite in the sense that when we talk about the return on capital employed we are talking about the profit measured as a percentage of capital employed. The denominator is capital employed, it is a ratio. The Treasury lays down a minimum of 6% to that indicator.

  95. Returning to the current performance indicators by which you were judged last year, you had problems in some areas, you missed, in fact, three targets; on costs; generated repayment work and timeliness. Why did you have problems in those areas?
  (Mr Hill) We failed on one key target in reality. There is always a problem with key targets in terms of the time scale from when they are set as to when they are measured. In terms of costs we actually came in on budget, but the communicated charge of consumeables, which are largely outside our control (they have to come under the control of the trading fund) was exceeded. We had no influence over that. In terms of costs we did come in on budget. If you look at the revised figure there in the annual report it gives an explanation on that as to why we failed to get that overall. Timeliness is, unquestionably, the most challenging target for the agency. It has many dependencies. It always has a dependency in terms of skilled manpower, but particularly spares and technical support can cause all sorts of difficulties in delivering on time. The other problem is emergent work and also the lack of discipline sometimes in the contracting process. That is something that we have been working very closely on in recent months in our run up to trading fund. Frequently IPTs will change the nature of the task they require on the aircraft after it is floor-loaded and that has an impact on timeliness, it makes it very difficult to measure. Towards the end of last year we had an upward trend in timeliness and so far this year we are coming very close to the target. In terms of Efficiency 2, which is repayment work, that figure was set jointly by the former NARO and the RAF MGDA agencies and there was a lack of understanding between the difference of forecast sales and actual sales. It should have been based on actual sales. If you take the actual sales we exceeded the target. If you take the forecasts sales, which are erroneous, then we failed. There is an explanation in the annual report between the actual and the revised targets. Overall, I think this is a hugely important issue for all agencies, the key targets should be viewed as a balanced scorecard. That has to take account of important issues. The DARA, for instance, like most other agencies in the MoD was loaded with a high level of risk, or underfunded in layman's terms, and that was at a level of 11%. So during the first quarter of the year we had to be very careful in our spending profile until efficiencies started to kick in and we had to rein in on things like overtime and on use of agency personnel to fill gaps to make sure that we came in on budget because the clear remit we were given was that we had to come in on budget. If you take a balanced score card and if you reduce funding you have an impact on timeliness and quality.

  96. How close are you coming to timeliness?
  (Mr Hill) In terms of timeliness we are now up to about 93% against the 95% target. There are always problems with specific aircraft because of technical support, spares support, or whatever, and we are trying to manage that better, but it is the most challenging area. It is also coincidentally as far as the front-line is concerned the most important key target.

  97. What is your expectation about your performance against targets for this current year 2000-01?
  (Mr Hill) We are exceeding three of the targets at the moment and we are aiming to come in on target with the others, timeliness being the one that is closest to the line, but all the others are on track at the moment including repayment work because we have got a solid benchmark now.

  98. What would the effect of availability of front-line aircraft be if you were able to improve your turn round times?
  (Mr Hill) Very significant and we are looking at two options at the moment. One is process acceleration and on some of our aircraft turn round times we have taken 25% out through better planning and taking out non-value added activity and diversions that people were facing on the shop floor. So the process of acceleration is absolutely crucial. The other area that we are piloting at the moment is moving towards a 24-hours-a-day seven-days-a-week operation so that for crucial front-line weapon platforms like the Tornado we have fewer aircraft in the Agency and therefore we can return more to the front-line for availability reasons.

  99. It is clearly a crucial area. The figures we have are 108 GR1/GR4 aircraft at units but another 66 undergoing deep repair.
  (Mr Hill) It is too many.