UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 120-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

DEFENCE COMMITTEE

DEFENCE SUPPORT GROUP

Tuesday 20 January 2009

MR ARCHIE HUGHES and MAJOR GENERAL DALE CBE

Evidence heard in Public Questions 1 - 97

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Defence Committee

on Tuesday 20 January 2009

Members present

Mr James Arbuthnot, in the Chair

Mr David S Borrow

Linda Gilroy

Mr David Hamilton

Mr Mike Hancock

Mr Dai Havard

Mr Adam Holloway

Mr Bernard Jenkin

Mr Brian Jenkins

Robert Key

Mrs Madeleine Moon

John Smith

________________

Memorandum submitted by Ministry of Defence

Examination of Witnesses

Witnesses: Mr Archie Hughes, Chief Executive, Defence Support Group, and Major General Dale CBE, Director General Land Equipment, Defence Equipment and Support, Ministry of Defence, gave evidence.

Q1 Chairman: Good morning and welcome. I hope that this session will be helpful in reminding the Committee about the merger of ABRO and DARA and bringing us up-to-date with where things are in relation to that merger. We hope that you will be able to look a bit into the future as to the role of the Defence Support Group into recuperating and regenerating Armed Forces' equipment, partly as a result of the drawdown from Iraq and partly in the light of the current study by the MoD on recuperation. If I may ask you both to introduce yourselves, please, and you are welcome as witnesses in front of the Committee.

Mr Hughes: I am Archie Hughes and I am the Chief Executive of the Defence Support Group.

Major General Dale: Good morning. I am Ian Dale. Just by way of background I am a 30-year front-line soldier and I am now working in Defence Equipment and Support where I have been for four months now. I am the Director General of Land Equipment, which means that I am responsible for the acquisition and sustainment of all land equipment to the Armed Forces. My role with the Defence Support Group is to act as the defence equipment and support customer focus.

Q2 Chairman: Thank you very much. I warn you, General Dale, that most of these questions are likely to be addressed to Archie Hughes in the first place but do feel free, please, to come in on any of the answers or any of the questions that you want because, as you have just pointed out, you are very important to this whole process.

Major General Dale: Thank you.

Q3 Chairman: Mr Hughes, before the merger you were the Chief Executive of ABRO and of DARA for a period of some months in order to help meld the two together. What were the main challenges that you faced in that amalgamation between the two organisations?

Mr Hughes: The first challenge was obviously in understanding both businesses. I had previously been Chief Executive of DARA for a number of years so I obviously understood the DARA business and the DARA people, the products and the processes. There was then a process of trying to understand the ABRO business and to look at the similarities and differences between the two businesses to see how they could come together. It was relatively rapidly evident that although they worked on different products they were very similar businesses. They were both in maintenance, repair and overhaul of defence equipment, and so what we had to do initially was look at how we would best bring the two businesses together from a managerial point of view, so the early part of the work was in looking at the management structures of DARA and ABRO and what the management structure should be for DSG, and how best to bring the two businesses together, whilst at the same time doing all the necessary legislative work to formulate the new trading fund that was going to be DSG. We had to run DARA, run ABRO and do the work to create a new trading fund called DSG, and therefore it was a pretty busy time in looking at how the two would come together. Also remember at the same time we were looking at selling some of the constituent parts of DARA, which was the rotary wing part of the business and the components part of the business, so it was quite a complex arrangement that happened at the time. We brought the new management teams together and did a lot of quite intense work to come up with the new structure for DSG. We did that quite successfully and therefore DSG was able to vest from 1 April 2008.

Q4 Chairman: What remains to be done in terms of difficulties to be overcome?

Mr Hughes: I do not believe there are any difficulties to be overcome now. I would say that ABRO and DARA are now merged and we are very much the Defence Support Group now. We regard ourselves as the Defence Support Group and everybody in the business sees themselves as the Defence Support Group and we now operate as a new single trading fund. There is still lots and lots of work to do because you do not overnight immediately become one harmonised entity. We have still got a lot of work to do in relation to the people dimension of the business in how we bring together the disparate human resources policies and procedures and terms and conditions of employment. Some have been harmonised already but we have more still to do over time and we are working closely with the employee representatives in dong that. We have lots of work to do in terms of delivering the benefits associated with the merger in embedding best practice both ways between what was DARA and ABRO and in delivering the best value for the defence customer. We are continually looking to the future as to what the future size and shape of the business needs to be. I regard it now that we are DSG and we are operating as DSG. We are proceeding with a degree of pace in transforming the business, trying to make it better, and taking the best out of both businesses. There is an awful lot of work going on at every level in the business to try and do that.

Q5 Chairman: What do you think the timescale is for completing that amalgamation so that for example the human resources rules all become the same?

Mr Hughes: We are looking to August this year to harmonise where appropriate the terms and conditions that apply to the various bits of DSG because, although it formed out of ABRO and DARA predominantly, we have also taken on board an element of what used to be DSDA at Stafford and we have taken on an element of what used to be DE&S at Sapphire House in Telford, so in actual fact there are four constituencies of people who are now under the DSG banner. August of this year is when we are targeting because that is our normal annual pay point with the trade unions as to when we are working between now and then to get the major stuff in place. Thereafter, we will roll out on a process-by-process basis improvements as and when we deliver them but that is a key point in time for us.

Q6 Chairman: Are the IT systems the same, do they talk to each other or what?

Mr Hughes: The IT systems are different. Both businesses operate in a manufacturing/engineering type of environment, so the air side (ex-DARA) operates on a Band system and the land side operates on a Simcom system. They do come together and we have done an awful lot of work already to bring together the next level up in terms of financial control and management, so the management information is already harmonised into one set of figures, one set of documentation. The operating sides can work quite effectively on their existing systems and we have no immediate plans to harmonise one to the other or one new system. It would be a very complex and very expensive process to put them on one system at the operating level but as time progresses and we reach a natural point to review the IT systems then we might make some decisions to harmonise. Effectively, the land system operates on its system, the air system operates on its own, and we have brought them together at the information-sharing level, one level above. Quite a lot of work went in in the latter part of the year before last in the run-up to DSG and then the first six months of being DSG to get that information, which gets presented to the likes of me as management and then I present further up the chain, to be consistent between the air and the land side. I think we have now got to the position where I get one report as opposed to I used to get two. I used to get DARA reports and ABRO reports; I now get DSG reports.

Q7 Mr Jenkins: Mr Hughes, in your answer you mentioned that you identify good practice and move it across the company. Who exactly is responsible for identifying and evaluating and then embedding that across your company? Which section of your management team does that, the accountants?

Mr Hughes: No, not just the accountants. I have a Chief Operating Officer who runs most of the businesses, and what I have now got in place is a transformation programme and it runs on a classical programme project management basis, so I run a change board, which I chair, and on that change board are all the various directors of the different bits of the business. John Reilly, who is my Chief Operating Officer, runs most of the businesses and because he runs most of the businesses he employs most of the people and therefore most of the change is in that area of the business. Underneath him there are a whole lot of change programmes that he runs. There are certainly change programmes in the finance area and the Finance Director is looking at change programmes in finance and he also looks at the pull-through of financial data across functions. Every one of the directors has got their own series of change initiatives, change programmes, and improvement initiatives that they run. I run a change board and each of them then run workstreams and have project boards. The project boards are made up of subject matter experts, and the subject matter experts might be an ex-DARA person or an ex-ABRO person. They come together and they will look at for example benchmarking ABRO/DARA or they might look outside to benchmark best practice outside, and through a process of proper investigation, trialling and piloting and so forth they will implement across the business what they believe is the best practice. All of that comes up to the change board for endorsement and ratification and so forth. There is a very clear, rigorous and disciplined process of implementing best practice across the business which is on classical industrial lines. It is generally the same way that you would do it anywhere else.

Q8 Mr Hancock: Before I ask my first series of questions, can I ask the General a question: how have you found this challenge so far as your role in the Army is concerned?

Major General Dale: I guess the bottom line is that the Defence Support Group has not dropped the ball on any occasion and so, despite the turbulence of the change and the amalgamation and the internal drive for efficiency that Mr Hughes is following, we have not had any perturbation on the outputs whatsoever. As I understand it, our outputs have been fine, so they have been timely, they have been on cost, and they have been to quality, so we are quite happy with the outputs at the moment.

Q9 Mr Hancock: What would be your route for taking complaints from lower down through you on to the new organisation? What is the route for that?

Major General Dale: There are several routes actually. There is almost a daily interaction between the staff in my project teams and the relevant staff within the Defence Support Group, so many of the issues are discussed face-to-face at the working level, and if there is something that goes beyond that then there are regular meetings between the IPT team leaders and the section leaders within the Defence Support Group. Personally I attend a regular board together with the Chief Executive and his main players, so if there are any issues that need to be resolved at that level that is where it is done. There is connection at almost every level and I think our communications and liaison with the Defence Support Group is pretty sound.

Q10 Mr Hancock: You said that you had spent 30 years as a front-line soldier, and I do not know how you feel about three months in a backroom in Whitehall or wherever you are located at the moment, and during that experience you would have come into testing times when you wanted modifications or changes to equipment and there was a process for doing it. How do you feel our commanders now in the field, and more importantly the people who use the equipment, feel about the way in which they can get their modifications made to suit their needs? Is it that your staff, Mr Hughes, go out to theatre or do some of the soldiers intimately using equipment come back to advise about what they actually need?

Major General Dale: There are a couple of ways again of doing that. We have a regular process in the Armed Forces of equipment failure reporting, so if there is an issue with an item of equipment that needs attention, it is highlighted through that process of reporting, and the integrated project teams at Bristol monitor the trends so they can highlight where there is a particular issue on particular equipment. It is the IPT that will then through that connection engineer a solution directly with the Defence Support Group. The requirement to change equipment would then be implemented through the Defence Support Group capability before the equipment is deployed, or indeed when the equipment has come back from deployment they will be upgraded as they come through, so there is a routine process for updating equipments. To give you an example, I had a team out in Afghanistan a couple of weeks ago checking through the equipment status and it was quite good news. I do not think we got any complaints about the type of equipment that we were delivering to them. It all seems to be quite fit for purpose. There were glitches in the communication systems on the equipment failure reporting system, but nothing that could not be resolved by liaison. I have officers permanently embedded in the headquarters both in Afghanistan and Iraq that monitor the situation, and the Defence Support Group regularly deploy people into both Iraq and Afghanistan so that they can help where help is needed.

Mr Hughes: I do not think I have anything further to add; we send people where they need to go.

Chairman: By the way, may I commend you both on the clarity and brevity of your answers because they are hitting the point straight on.

Q11 Mr Hancock: Can I then raise with you the amalgamation and when it took place. You had experience, as you said, of being the head of DARA. You went over to ABRO and you saw that in the time that you were Chief Executive there. Now you are in sole command of the operation, what was the duplication that you found, and have you been successful in eliminating that duplication to your satisfaction or is there still work to be done?

Mr Hughes: When you look at DARA and ABRO there were a number of functions that were the same in both and therefore they overlapped, for example we had two corporate head offices, so there was an obvious overlap at the head office side of the business. There was a DARA head office and there was an Andover head office and therefore there was a degree of duplication at the support staff side of the business; there were two boards, two chief executives, etc., etc. Therefore there was an immediate synergy that could be gained by looking at the way the senior management was structured and the corporate head offices were structured in ABRO and DARA. Therefore relatively quickly I was able to put together a single board and look towards generating a single head office and a head office with a reduced number of people because there was synergy benefit to be had. We have moved pretty quickly there and we have slimmed down the head office somewhat already. I believe there is probably more to do over time because you might want to slim it down but you do not want to reduce your capability at the same time, so you need to work through a pretty steady process of getting there. We have slimmed down the head office and we have obviously combined the two boards into one board and there was obvious synergy benefit there. There was very little operational overlap because we were repairing tanks in one factory and electronics in another factory and there was not an operational overlap to any great extent. Although there were different operational organisational structures, I have also streamlined the operational management for DSG compared to what the ABRO and DARA businesses were. In terms of looking forward we have instituted a number of studies to seek out where there might be more synergy benefit to be had. An example of that could be in relation to the electronics activity that we do across DSG. There is an electronics business in DARA at Sealand; we do electronics and electrical work at Donnington in the test business; and we do some electronics work at Stafford, so we have three different sites all doing electrical work. I have instituted a study to see whether or not there is any potential synergy or harmonisation benefit to be had there, but we are not going to mix the aircraft product with the land product because they are different. To date we have done quite a lot and we are continuing to look for future synergy benefit as it arises.

Q12 Mr Hancock: Thank you for that. If I had been an executive team member on ABRO I would have been slightly cheesed of that I and most of my colleagues went out the door and most of the DARA executive team remained. What was the motivation behind that, was it competence, ability, or just that it was better to keep one team in place than try to mix two?

Mr Hughes: It was a mixture of a range of factors. I do not think we set out when we amalgamated the two boards to end up with a primarily DARA-related board as opposed to an ABRO-related board. Some of if was through my choice; some of it was through the individuals' choice. For example, the Deputy Chief Executive of ABRO retired at 60. I do not have a Deputy Chief Executive anyway, but he chose to retire at his normal retirement age, and that played my hand for me in that regard. The Finance Director of ABRO moved to DE&S in Abbey Wood. Others chose to leave and others' jobs were not there any more. The intent was not to set out to have a DARA board; it happened a bit by design, a bit by default, but the clear intent was to have a reduced, streamlined more effective board, and I am more than content with the board I now have. There were a number of non-executive directors in both businesses and we also streamlined that down as well.

Q13 Mr Hancock: In your memorandum to us you said that you have already identified £10 million-worth of savings and they have been achieved. Did most of that come from the corporate management part of the business or did if fall mainly elsewhere in the business of actually repairing equipment?

Mr Hughes: Most of the saving came out of the support areas of the business, primarily first of all in having one board, you save a fair amount of money having one board, and you save a fair amount of money with the direct support staff who support those two boards. We also saved a fair amount of money in reducing the corporate head count. As I mentioned earlier, we brought two into one. We saved another bit of money in relation to people when we brought on board the land supply business from Sapphire House because we now have something like 219 people in Sapphire House in Telford and the previous activity was done by over 300 people, and it came across. Then a further element is in the operational area of the business where we have saved a fair amount of money in material cost and things of that nature. The initial tranche of savings, if you like, were primarily to do with the support areas of the business. We are obviously focusing quite heavily this year and going forward into how we make the operational end of the business more effective and efficient and better value for money. I am pretty sure there are more savings to come at that level of the business. Looking at the operational management for example, in the ABRO bit of the business we used to have a director, a regional manager, a local manager and ops manager. At least two of those layers no longer exist.

Q14 Mr Hancock: That is good. Would you say the rationale for the amalgamation is as sound today as it was nearly two years ago when it was first put together? Would you say there were any surprises that you have discovered since the amalgamation has taken place which you did not foresee but which have actually arisen, and are they to the benefit or detriment of that amalgamation?

Mr Hughes: I would say the rationale has been proven by the implementation of DSG. The output, as the General said, is at least as good if not better in terms of the quality and delivery and so forth, so we have maintained the output at reduced cost and therefore the rationale for producing the DSG out of ABRO and DARA was sound and has been proven to date by delivering those types of benefits. Obviously when you take on any new role you find things that you never knew were there, and in relation to the ABRO business in the last six months of last year prior to the DSG being formed we unearthed a number of cost surprises in the ABRO side of the business and we unearthed some financial forecasting/financial control surprises in the land side of the business, which were a bit of a surprise to me in terms of running the DARA side of the business. The good news is that we have recognised them and we have now put in place the actions to improve them and there are much better financial and cost control mechanisms in place. Taking over any business every week you find a new thing that you never knew; that is running a business.

Q15 Mr Hancock: Despite all the obstacles that were in the way, DARA came into this partnership in profit and ABRO came with a loss situation, and one could argue that this was done to smooth over the loss-making one to make it an organisation where one carried the other. Has that proven to be the case or is it now that you will see this organisation stand on its own two feet, both elements of it now one, which will actually turn a profit?

Mr Hughes: If you look at last year, obviously DARA made a profit and ABRO did not, and the cost situation in relation to ABRO was one of the surprises that I unearthed. I think the way we have set the business up now DSG will be profitable and I believe the land constituency and the air constituency will both be profitable this year.

Q16 Mr Hancock: That is great, thank you.

Major General Dale: Can I throw in a customer perspective on this. One of the advantages to me as a customer of the DSG formation is that I have now got a single point of contact that I can deal with which makes my relationships with the organisation so much simpler and so much clearer. I am assured now that the organisation is beginning and has made quite a lot of progress in getting to grips with its costs, which is important to me as a customer of course because the more they can drive down their costs the more I can push through the organisation, which is what we want.

Q17 Robert Key: In his May 2007 statement Lord Drayson said that the MoD wished to retain the intellectual property and design skills required to maintain operational sovereignty in key areas. Can you remind us therefore why the rotary, components, fast jet and engine businesses were not included in the merger?

Major General Dale: It is a difficult one for me to answer because I am afraid I do not have the legacy history of that so what I am going to say to you is dredging my memory and, if you wish, I can get a clearer written answer back to you after the meeting. As I understand it, one of the tenets of the Defence Industrial Strategy was to optimise and lever more effectively the power and capacity of industry, and one of our mantras within defence equipment and support is to move our support contracts up what we call the transformation staircase. That is to say moving away from support solutions that rely on DE&S to manage, procure and deliver support to in-service equipment to contracting with industry for them to do it instead, because they have a greater capacity, they can drive down costs more effectively, and they can provision more accurately, so one of the reasons for moving to that kind of support for helicopter engines was exactly to achieve that kind of efficiency in support.

Q18 Robert Key: Is it because you no longer have the volume and the capacity to cope with the high level of requirements from theatre?

Major General Dale: I do not think that is the issue. In terms of volume and capacity I think Mr Hughes can answer more directly.

Mr Hughes: Just going back to the earlier part of the question, because I was around at the time and was involved in the selling of the businesses and whatever, from a strategic point of view in the air side of the business there were a number of people who were in the same space, essentially, doing the same type of work. We have reviewed in other fora the fast jet decisions in terms of rolling forward, because there were people other than DARA who did fast jets. The same was true in the helicopter world. The contracts we had in the DARA business on helicopters, on Chinook for example, were through Boeing and there were a number of other alternatives to DARA doing it, so the strategic options were wider for MoD than just actually in relation to DARA, as opposed to some of the businesses we do now where we are the unique and sole provider. In terms of the capacity question, there is certainly capacity in what is now the Vector Aerospace business at Fleetlands to do all of the requirement for helicopters that is currently around, and we would still have had the capacity to do it. In actual fact, there is more capacity out there than just the helicopter facility that is in Fleetlands because a range of different industry players also do the helicopter MRO.

Major General Dale: One of the key things I might add about the Defence Support Group that I look for as a customer is the ability to deliver services and functions that are not readily available in industry, so for example support legacy equipments or equipments that are running towards obsolescence. Where the knowledge and the skill sets required to support those equipments is beginning to fade through industry and where the capacity exists in industry, the aim would be for them to support it because it is cheaper and they are better at doing it. Where the capacity demands a particularly unique skill then that is where we would lever the power of DSG. We would hope in the future as part of our contracting for availability work with industry to have DSG included in that as a sub-contractor delivering those unique capabilities that industry cannot.

Q19 Robert Key: So you do have the technological skill, including computer software and design and so on, to handle the most sophisticated helicopters? You could do it but it is just more efficiently done somewhere else?

Major General Dale: Correct.

Q20 Robert Key: So can you please explain your relationship with QinetiQ and tell me why it is that the eight Chinooks are being worked on by QinetiQ at Boscombe Down and not by you? These are the ones that are being brought into service now after sitting in hangars for many years.

Major General Dale: It is a decision that I do not have any information on.

Mr Hughes: I think I can give you a little bit of information on that. By 'you', you mean the ex-us, now Vector Aerospace, because we are no longer in the helicopter maintenance business. It was purely a case of the engineering activity associated with the helicopters had been derived through the QinetiQ business as opposed to through us, a lot of the technical information and the technical proving etc. had been done through the QinetiQ business and therefore having done all of that activity there it was felt that was the most cost-effective way to do those eight aircraft. To a certain extent that also proved the point that there were people other than just the DARA business that could do this work on helicopters.

Q21 Robert Key: But it was not competed, was it?

Mr Hughes: The DARA business did have the option of looking at doing the work on those aircraft but the most cost-effective solution was to do them in QinetiQ.

Q22 Robert Key: How do you know that if it was not costed?

Mr Hughes: We put forward costed proposals when we were part of DARA. Obviously since we sold the business the contract has been let on a different basis, so I cannot comment on what happened with Vector Aerospace. The best solution for defence that was arrived at in terms of value for money, and I am sure to a certain extent not to interrupt the repair activity at Fleetlands, was to do this work at QinetiQ.

Q23 Robert Key: So you regard yourselves as being in competition with QinetiQ?

Mr Hughes: I do not do helicopter maintenance, repair and overhaul anymore so I am not in competition with QinetiQ at all. Whether Vector regard themselves as being in competition I could not answer.

Q24 Mr Hancock: The competition will only be there on this job because QinetiQ had the experience and the knowledge on these helicopters. Even if you had got the job and the helicopter division had stayed you would still have had to buy in that knowledge from QinetiQ anyway.

Mr Hughes: We would have had to have bought some of the technical knowledge in from QinetiQ. One of the options the MoD had in selling the helicopter business was for them to create an even more competitive market-place for helicopter maintenance, and that is what this is an example of.

Q25 John Smith: Mr Hughes, you said you oversaw the selling off of the rotary and component business; what level of interest was there in that business? Were you pleasantly surprised that a significant number of companies expressed an interest in buying that or were you disappointed that some of the key players did not even show an interest?

Mr Hughes: I was not pleasantly surprised, I expected there would be a significant interest from a number of private and industry parties in the rotary and component businesses. There was a wide range of interest in buying those businesses and there was quite a robust competitive process in eventually selecting Vector Aerospace as the company that would buy them, so most of the major players were actually interested to an extent or other in purchasing those businesses.

Q26 Mr Hancock: A key role of DARA, and presumably DSG now, is to provide a benchmark in the defence support industry and a competitive market to make sure that the British taxpayer is getting value for money. Are you satisfied that those areas that you no longer control - fast jet, rotary, components - are providing a competitive environment and providing value for money for the British taxpayer?

Mr Hughes: I do not really know that I can comment now because I am not involved in those businesses.

Q27 Chairman: It is not really a question for you.

Mr Hughes: And therefore I cannot actually make a judgment as to how competitive or otherwise they are because I am no longer involved in the management of them.

Q28 Mr Hancock: One of the issues in my area, which is Portsmouth (and Fleetlands is very much part of that service value there) was that this was more about land acquisition than it was buying a facility that would long-term manage the helicopters. Did you sense that at all, that this interest was more about occupying very expensive and potentially very rewarding land rather than a business?

Mr Hughes: No, not at all. We sold a business and the party at the other end of the table was buying the business. They were very much focused on growing their business. They were in the helicopter MRO business and they wanted to expand, and this was an ideal opportunity for them, and that has been borne out, as far as I can tell, because they have brought extra work into the Fleetlands facility since they have taken ownership of it and they are doing more engine work and so on and so forth. They bought it to grow their footprint in the helicopter MRO business. Land is always part of a sale but they never bought the business for the land; the land came with the business.

Q29 Mr Hancock: But they can sell the land that is surplus to their requirements for more than they paid for the business.

Mr Hughes: That would be a matter for them. I do not believe that is the case but that would be a matter for them.

Mr Hancock: I think it is very much the case actually, Mr Hughes.

Chairman: Still, it is not your responsibility.

Mr Hancock: Not now.

Q30 Chairman: Can I come back on a question that Robert Key asked that you do have the capacity to do helicopter stuff, it is just that because there is that capacity in the private sector it was thought appropriate to put it out to the private sector. However, does the existence of DSG have any effect such as inhibiting the growth in the private sector of the skills and the capacity that DSG currently undertakes?

Mr Hughes: First of all, we do not have the capacity to do helicopters now in DSG. In the broad range of what we now do as DSG for a large part of it we are the only people that do it and we are the only people who have ever done it, so a big distinction between the aircraft side and the helicopter side, or even the fast jet side, and the land side of the business that is now DSG, was that industry did a lot of the maintenance, repair, overhaul and upgrade of aircraft. On the land side we in the ex-ABRO business are the maintenance, repair, overhaul and upgrade facility for the UK. Certainly the heavy end of the business industry do not do it and have not done it, and therefore on the question about creating or not creating capacity or inhibiting the creation of capacity elsewhere, it is a matter for industry to decide whether or not they wish to move into this market space. That is always a decision they can make but hitherto they have not been in the space we are in for the large part of what we currently do. I do not believe that it necessarily inhibits it because of DSG; that is always a decision that is there for industry to make depending on their business model.

Q31 Linda Gilroy: It is perhaps clear because you have got the unique facilities there that that applies to armoured vehicles, but does that extend to all the other business elements within DSG apart from the ones we have just been discussing, and which parts of the business could not be handled by the private sector within the UK even at greater cost?

Mr Hughes: The private sector can probably handle almost anything at whatever cost, but they would not because it would be cost prohibitive to move into a lot of the areas. In the land area obviously we have got the armoured vehicle activity which is relatively new. We do small arms at Donnington for example which is another area of capability that we have that is pretty key. A lot of the activity that we do at the Sealand electronics facility - we do crypto, we do avionics, we do a range of things - is of great benefit to the MoD to retain that in-house and retain the sovereign capability to go forward on other programmes of activity. In the large aircraft business we do the VC10. It would not make sense for anyone else to pick that up and do it. It would be extremely cost prohibitive to do that. There are slightly different variations depending on where we are. We do a lot of work on things like Land Rovers for example. There are plenty of individual people who could work on a number of Land Rovers but at the moment at any rate there is not anyone who could do the totality of the job that we do, the one-stop shop activity that brings in the geographical positioning of our business, because we have a lot of sites all around the country which are very, very strategically positioned in relation to the customer which enables us to manage a load of work that a lot of individual companies could not do, so we have got that breadth of capability and capacity as well. There is quite a number of different themes within the DSG.

Q32 Linda Gilroy: I understand that there are about 12,000 Land Rovers in use by the Armed Forces. Does not being able to do the whole job as you were describing apply across the whole range of Land Rover assets?

Mr Hughes: In what sense?

Q33 Linda Gilroy: Well, it is difficult to imagine that somebody could not do the whole job so maybe you could tell us more about that and does that apply across the piece to all 12,000 or so Land Rovers?

Mr Hughes: In relation to Land Rovers we can do everything from changing the tyres to rebuilding them to up-armouring them to putting on sophisticated military systems that would go on military versions of them, so there are military dimensions to it that we can manage and there are scale and geographic dimensions to it that we can manage. For the less complicated and less sensitive tasks we subcontract Land Rover work out to local areas. We do a lot of Land Rovers for TA and things like that where the work for that is almost a routine maintenance activity where we can subcontract. It is much easier to contract through us and for us to manage the whole than maybe have IPTs try and manage hundreds and hundreds of ones via their own resources.

Q34 Linda Gilroy: But you do subcontract what you have just described. What sort of proportion would you subcontract?

Mr Hughes: The subcontract work is relatively low in proportionate terms of what we do as a business. It is in the few per cents, not many more.

Q35 Linda Gilroy: So were there other bidders for the MoD contract that is worth £875 million which you recently won?

Mr Hughes: No.

Major General Dale: May I throw a couple of customer perspectives in here. With one possible exception, there is nothing in theory that industry cannot substitute in DSG so long as they throw their minds and their money at it. From my perspective there are a couple of key things that DSG can deliver which I think would be cost prohibitive for industry. The first is that I can change the priorities for work very quickly and very easily with the Defence Support Group and they have the capacity to swing the resources around as the operational requirement demands it much more flexibly and probably more cheaply than industry ever could, so that would be my first point. They are incredibly flexible too. I can draw people out of the Defence Support Group at fairly short notice and deploy them for urgent operational work in Afghanistan and Iraq. Industry could do that too but it would be very costly and I would have to train them. I can train guys in DSG and they stay there and I can reuse them regularly, so that is another element of flexibility. Just to reinforce the point that Mr Hughes made earlier about geography, many of the DSG work spaces are co-located or very close to garrison areas and airbases, and it is very easy for us to swing work in and out and it is very flexible again, so an industry that takes that on would have to disaggregate in some way in order to achieve that geographic synergy. The one thing that I come back to that I do not think industry can substitute there is one element of DSG - Sealand - which is a government-owned capability and through them we can get better access to foreign intellectual property rights than any industry ever could. That is a really important thing to do.

Q36 Mr Borrow: I want to raise a question I was going to pick up a bit later but I think we have touched on it already. In Annex B to the MoD memorandum, they list a number of land equipment areas that are considered to be strategic and core activities. I wanted to test whether or not some of those were desirable rather than absolutely essential to be done by your organisation and could not actually be done by the private sector. I just wonder if I could touch on perhaps some of the areas around maintenance and upgrade of legacy electronic equipment where there are companies such as Thales for example who may have some of the capability. I just want to firm up why you have got that whole list as it is on that Annex B and to know whether everything on there is absolutely firm as far it is being paid to be done by your organisation and none of it could be done by anybody else.

Mr Hughes: I will just pick up a couple of those points. I think the General has just said that at a price things can be done in other areas, and some are higher up the list than down. At the Sealand electronics business, for example, you are quite right, Thales, Finmeccanica, Smith's, BAE, a whole raft of people work on the existing legacy kit that we work on. In actual fact, we are partnered with most of them and we work in a partnered way with them because they own the IPR for a lot of that kit on the legacy fleet - the Tornado, Harrier, Lynx, and the Chinook - and the electronics avionics that we work on. We have got very good relations with them and they choose to work with us on a contract, partnered basis. Our contract in a lot of that work is through them. When you look to the future, and in relation to different elements that might come into the electronic business, we might work on, let us say, some stuff in the US where we might need access to IPR, which is the point the General was making that because we are MoD-owned there is less of an issue in relation to us being able to work on that kit as opposed to another party. There was absolutely a strategic need to retain that capability. In terms of the list of things that are in the Annex that you have got, these have been generated to a certain extent over history and practice of what we do, and therefore because we do it the customer gets benefit out of us doing it. Some of it is to use us as a competitive lever, as was mentioned earlier, so that by us owning it we do give the customer options that otherwise might not be there, so it can be very important to retain a competitive leverage elsewhere. We do not always get all the work we would want, some of it goes elsewhere, and some of our utility is actually across this range of capabilities testing from time to time whether or not the customer is getting the best value through the traditional route or through the internal route. I am pretty sure from time to time individual elements of this list will be a higher or lower strategic necessity but certainly at the minute these are the areas where we provide the most utility to the customer in giving best value for defence.

Q37 Mr Jenkins: I want to extend this point because, as the General said, we can deploy forces from DSG to Iraq and Afghanistan because they are trained and retained as insurance, almost like in my town and all our towns we have a fire service. We never want to use them but they are expert, trained, deployable forces where we pay an insurance to maintain them alongside us. Where exactly does this insurance premium fit on the books as far as equating against competitive tenders from outside whereby if we do not have this retained force we lose that degree of flexibility, we lose that back-up and, in effect, it is an insurance premium that we should be prepared to pay as nation. Where does it fit on your books?

Mr Hughes: Obviously there is no financial premium in the books because the people we use are people who are doing a job of work. They are not sitting around doing nothing; they are working, and we reallocate the people. However, the utility for the customer in defence and part of what the General pays me for in the round is in retaining that capability in DSG ownership. I have got my apprenticeship schemes, I have got all of the various training schemes, I have got the number of people I require to do the job, and all of that works its way through in the cost of what I do at the macro level. When you add up all the little bits, the total price that the General pays me in the rates that he pays me are such that it means that I retain that capability. To a certain extent it comes to me via the workload I get and the General pays for the workload. Firstly, he is happy with the price he gets - hopefully - and secondly, we are retaining that capability. Because we work quite closely in defining the load for the business we can move around, it is not an additional cost to retain these people we have in the business; it is the way in which I manage the manpower loading across the business.

Major General Dale: If there was a cost it would be in the priorities that I set for the output from the organisation. If I wanted to deploy particular skill sets to Afghanistan, as indeed I am intending to do very soon because there is a particular need out there that needs to be addressed fairly quickly, I have to reprioritise the other work that I want done. It is all part of the output process.

Chairman: We will be coming on to apprenticeships and things shortly. Linda Gilroy?

Q38 Linda Gilroy: You were mentioning the JSF and Sealand and its very special role in that and the agreement with the Americans. Are there other elements of DSG work that fall within that kind of category of operational sovereignty?

Mr Hughes: If we are looking at the land side of the business obviously via the Defence Industrial Strategy there is a requirement to maintain an onshore capability for the maintenance, repair, overhaul and upgrade of land vehicles. Looking to the future and future procurements in the land arena, then retaining the capability in DSG to maintain, repair and overhaul any future procurements in the land arena will be key, and having access to the IPR to enable us to do that will be key on potential future land procurement areas.

Q39 Linda Gilroy: So on that issue has the current uncertainty over FRES caused any concern within DSG on its future workload and what it needs to preserve in the way of the capability that you have just been discussing?

Mr Hughes: We work very, very closely with the customer in terms of DE&S on FRES but also industry and all the various industry players in relation to FRES. Looking to the future of FRES, whether it be the utility vehicle or a scout vehicle, in the immediate time-frame FRES was not part of the DSG plan because you had to go through procurement and then once you had been through the procurement you move into maintenance. We still intend to be fully involved in FRES whatever and whenever it materialises ---

Q40 Linda Gilroy: Or if ever!

Mr Hughes: --- And we will continue to work closely with the customer and industry to make sure we have got the capabilities and capacities required to do maintenance, repair, overhaul and upgrade or anything else that is required via that particular procurement.

Q41 Linda Gilroy: So would you be able to surge to accommodate that because there is a lot of uncertainty over the programme?

Mr Hughes: Surge is one of the key capabilities that we have in general, not necessarily in relation to FRES because FRES will have a planning horizon. Surge tends to come with not a great deal of notice, but we have a planning horizon on FRES where we will be able to work it into our programme.

Q42 Chairman: It is a 20-year surge, is it?

Mr Hughes: I do not think surge is an immediate worry in relation to FRES. We manage surge in close co-operation with the customers because as the General says, we have to prioritise what we do and surge is how we prioritise what we do.

Linda Gilroy: Thank you.

Q43 Mrs Moon: In an interview in DIGEST magazine Baroness Taylor said that in contrast to the business that makes up DSG the DARA business, and in particular the rotary components, had a finite life, so is it fair to say that finite life could also be described as the future of St Athan?

Mr Hughes: We operate the large aircraft business out of St Athan now, which is obviously the VC10, so that business in relation to what is now DSG will be there for as long as there is the VC10 and currently it has a secure future up until the out-service date of VC10 which is in and around 2014. It is too early to say what will happen after then, although we are obviously working closely with all interested bodies in relation to St Athan and the workforce that is there, whether it be the Welsh Assembly Government or British Aerospace who contract the VC10, and a range of people, to look at what the options might be post VC10 at St Athan. Given the fact that we have still got five years of VC10, it is a bit too early to say what the end game will be in relation to St Athan. In that time period from an MoD perspective the DTR project should also come on-line to some extent at St Athan and therefore options have to be explored from a workforce point of view as to what does DTR mean. The other element for St Athan is the Welsh aspiration for an aerospace park and what capabilities and skills of the people there may be utilised in that regard. The business is VC10 based and it is there until at least the year VC10 goes out of service.

Q44 Mrs Moon: Are there any plans to bid for work with the FSTA and the FCA?

Mr Hughes: The FSTA programme is one which has been awarded to a private consortium and the maintenance activity associated with that will no doubt emanate from there. The one where we are spending more time at the minute is with the Welsh Assembly Government and with BAE Systems looking at the C17 and whether or not there are any options for doing the C17 at St Athan. One of the things we also have to remember about St Athan of course is that we are currently in what is known as the Red Dragon super hangar and we will be moving out of that back into the Twin Peaks facility where we used to be originally when the DTR facility moves into St Athan. We have to look at the facility limitations that there may or may not be for future large aircraft. We are looking at any and every option we can aircraft-wise at St Athan, but we do recognise that there are going to be challenges associated with the future workload there.

Q45 Mrs Moon: Is there any chance of the corporate strategic plan, which you said you hope to be having agreed in March, might be made available to the Committee?

Mr Hughes: We plan to take the corporate strategic plan to the Minister in March via my Owners' Advisory Council. Obviously the strategic plan contains quite an amount of commercial, financial and other information.

Q46 Chairman: We are very secretive!

Mr Hughes: I will take that back and ask the Minister and if he is content to copy you it then we will.

Chairman: Thank you very much. John Smith?

Q47 John Smith: Part of the thinking, as I understand it, of not selling off the VC10 business was not just value for money but that it would present MoD with a good opportunity to manage the transitional period with the onset of the Defence Technical Academy. I just wondered how that is going, whether there are any problems there given that the Defence Technical Academy will be the largest ever Ministry of Defence investment. You have been there for quite a while, you have interests on that site and I just wondered how it is going.

Mr Hughes: I am not experiencing any difficulties and I hope there are not going to be any difficulties. We obviously work quite closely with all the participants in relation to what was the DTR programme, not just because of the facility that we occupy currently and the fact that it will become part of the new Academy that is going to be there. I am obviously quite well involved with elements of the DTR, for example with Metrix and others, and already discussing whether my skill set meets their skill set into the future. I have meetings coming up shortly with the managing director of Metrix to look at that. You have to see whether the timings, the workload and the skills sets are going to be right or not right and so on. I have not experienced any difficulty in association with that. I am connected via the Welsh Assembly Government activity that goes on as well as the MoD activity that goes on and everyone involved from a DSG point of view at St Athan is as close to it as we can be. It has not caused us any problems and I do not envisage it causing problems but we need to try and match timetables to best suit the people as much as we can.

Q48 John Smith: Is it the case that should the large aircraft have to move out of the Red Dragon hanger into Twin Peaks there will a cost associated with that? Will that fall against your organisation's costs or will you be able to recoup some of that from either Metrix or the Welsh Assembly Government?

Mr Hughes: It is highly likely that we will have to move out of the Red Dragon hangar at some point, probably only to do minor maintenance on the VC10s as opposed to the major maintenance in terms of the timetable. You are right, there is always a physical operational cost of moving from one hangar into the other and the costs associated with that will not fall to me other than in respect of any costs I have I will recover from other parties, and some of the recovery might come via the VC10 contract itself up through that customer, and I may be able to recover some via the DFR route because part of moving out is because of the DTR. I expect there will be costs but I will recover my costs associated with it.

Q49 John Smith: What about the cost of maintaining the runway? Again, as I understand it, DSG is paying a disproportionate amount of that annual cost, and I wonder whether any efforts are being made to try and recover some of that.

Mr Hughes: The maintenance of the runway is primarily paid for by the Welsh Assembly Government but we are paying a relatively high cost for the running costs associated with the runway in relation to the number of take-offs and landings of VC10s because not a lot of them happen in any given year. There is an airfield management agreement between MoD, DSG as it is now, and the Welsh Assembly Government where periodically we review who pays what amount of cost. I am in discussion with the Chief Executive of the Welsh Assembly Government to readjust that looking forward, and negotiations will continue.

Q50 John Smith: Finally, you mention the C17 work; are you looking at any possibilities to bring into the business and are you in any discussions with BAMC, which is a major MRO British Airways facility in the vicinity? I just wondered whether there was any synergy there given that you are going to have to move and it is a big challenge.

Mr Hughes: In relation to BAMC we speak periodically with BAMC in relation to MRO. Up until now we have not identified synergies between us and them from a work moving either way point of view. In relation to the VC10 moving into Twin Peaks and then C17 in Twin Peaks, the C17 is there because it is a requirement that has been on the table. From time to time A400M comes up, goes away, comes up, goes away, in relation to the maintenance activity associated with it. We are maybe facility-constrained in relation to the type of aircraft that can fit into our facility. That may or may not go away as a problem depending on what happens with the aerospace park from a Welsh Assembly Government point of view. We have an open mind and are continually looking for opportunities, recognising that there are very few low-hanging fruit in relation to the opportunities that are there for that business.

Q51 John Smith: But it is worth remembering that even after the Defence Technical Academy is built there is still a huge area with potential for development as a British Aerospace park, in excess of 200 acres, with runways.

Mr Hughes: Yes. And I believe the Welsh have aspirations to do things from an aerospace park point of view.

Q52 Mr Hancock: What is your estimate of the continuing life of the VC10s as far as you are concerned from what it was?

Mr Hughes: The out of service date is 2014; 2013/2014 is the current out of service date for the VC10.

Q53 Mr Hancock: You have not been asked about whether or not that can be extended, maintenance-wise?

Mr Hughes: No. It used to be earlier than 2013/14 but 2014 is the latest extended VC10 out of service date.

Q54 John Smith: And a decision would have to be made now, would not it, because of the age of the aircraft, and if there was any possibility of extending if any further with the delay on the new tanker?

Mr Hughes: From my perspective I am not anticipating an extension beyond 2014. If events change then we will obviously react to whatever comes out of the customer community, but that is the current position with the VC10.

Chairman: Apprenticeships and Madeleine Moon.

Q55 Mrs Moon: DSG, you have said a couple of times in your presentation that you are particularly proud of the skills and apprenticeship bases of ABRO and DARA. Are there any particular skills areas or knowledge areas that are currently lacking that are impacting on the business, and are apprenticeships actually becoming more important because of the nervousness at losing that skills and knowledge base?

Mr Hughes: If we take it from an apprenticeship end we do not have any difficulty in recruiting for apprenticeships. People who go through a DSG apprenticeship or an MoD apprenticeship come out at the end with a passport that will last them their entire life, their entire career because it is an excellent set of training that they get. So we are always heavily over subscribed to apprentices when we are looking for them. So at the base skills level in entering in technical and engineering apprentices we do not have skill shortages at that level. We tend to have some skill shortages in the geographical bases that make it difficult. We have a facility in Colchester where we employ through Colchester about 140 people. It is a bit more difficult recruiting people in that area than, maybe, Catterick, just because of the geography and because of alternative employment options. But because of my geographical footprint I actually have the ability to move the work to where the people are as well as vice versa. So I do not have skills shortages and I have more than enough applications for apprentices for those that I identify. And in most areas of the business when I am recruiting we get a lot of high quality people applying for the jobs. So in Telford last year we were recruiting some permanent staff and we brought the Telford town centre to a halt because about 1000 people turned up for the jobs there.

Q56 Chairman: How many people were you applying for?

Mr Hughes: We wanted about 50.

Q57 Chairman: And you had 1000?

Mr Hughes: We had hundreds of people. That is by the way, though, because we are seen as a good employer by most places in the country. As part of DSG and as part of a human resource work stream in terms of transforming a business we are looking at our development programmes beyond just the apprenticeship stage, such as how do we get people up through the business into the managerial areas. It can be more difficult and we do need to grow our capability of programme management, project management and some of the higher level managerial skills. We have just recruited I think three new financial controllers for some of the various businesses because we did not have those skills inside and we had to go outside. So we are trying to get a bit more development to try and pull people up into some of those roles, although in relation to apprentices a number of people on the DSG board are ex-apprentices, so you can go from an apprentice to be on the board and run the businesses . So I do not experience much in the way of skill shortages and I certainly do not experience much in the way of trying to attract people in the business where I need them, other than the odd geographical hotspots where employment, up until last year - I do not know what it is going to be like the next time we do it - there were lots of jobs.

Q58 Mrs Moon: It is interesting because you said that taking on one of your apprenticeships was a passport. What about actually keeping people after you have trained them, in terms of remuneration? Where do you sit in terms of perhaps pay in the private sector and how much are you losing people once you have trained them, once they have their skills, into the private sector; or are you paying better or are you paying worse? What is the ratio?

Mr Hughes: I think we are paying at a level that retains the people. In terms of from an apprenticeship, shop floor, technician level, attrition rates are very low. Whether they come through the apprenticeship scheme or whether they come through other means in terms of us employing people from outside we offer quite a good rate of pay. I am not saying that we offer industry benchmark levels of pay - we are civil servants - but we certainly offer sufficient levels of pay to retain the people that we have. They do not leave in droves. The passport for the apprentices is one of the things that attract them in and then once they are in most of them like it and most of them are good and most of them progress in a career sense if they want. A lot of them are quite happy, they want to keep a technical career and others want to move through management.

Q59 Mrs Moon: In terms of productivity output, what do your hours for your skilled engineering staff look like in comparison, say, to equivalent hours of output that you get in the private sector?

Mr Hughes: It is quite difficult for us to draw comparisons directly between us and the private sector, primarily because the private sector does not do what we do; they do not maintain and overhaul the armoured vehicles. What we have is internal benchmarks. I operate across a wide range of sites and it is fair to say that they operate at different levels of productivity. So I have an internal benchmark and marker to utilise my best practice on whatever site it is to try and drive up the productivity on the less productive sites. So we do have quite a close look at this and we monitor it every month and we use it every month to drive up productivity. When I look at the average and I compare it to my industry days we are no different to an engineering manufacturing business elsewhere. That is what we do.

Q60 Mr Hancock: Can I ask you what proportion of your business at the current time is dependent on operational requirements and what proportion of your staff are engaged on that?

Mr Hughes: It is difficult to give an absolute number in terms of what is operational versus what is not because everything that we do is preparing, maintaining and going out and back from theatre. A fair degree of our funding comes via the Conflict Prevent Fund and that is maybe 15 per cent in the round comes via the Conflict Prevent Fund across DSG. But most of what we do ends up in operations.

Major General Dale: It is a difficult question to answer in absolute terms and I will give you a for example. One of the elements of DSG's work is often called the local district load and when I was commanding my brigade ten years ago we relied very much on what was then ABRO, now DSG, to come into our barracks to undertake tasks that we could not undertake in inspection overhaul and repair because my soldiers were deployed on operations and there was still kit left back behind in barracks. So that is an indirect support, if you like, to operations, and there is a lot of that going on. In terms of equating the source of funding directly to operations, that is to say those elements of work that attract contingency funding money, that is vested essentially in the embodiment of urgent operational requirement equipments on to vehicles, so there is a direct linkage with the operational requirements with the UOR, which is funded by the contingency fund. Again, when we look forward to withdrawing equipment from operations and refurbishing it that too will be a direct support of post-operation activity and will attract contingency funding.

Q61 Mr Hancock: Are you working on the assessment of the equipment that is currently in Iraq and will actually be removed from the country as opposed to being left somewhere in the Middle East, or not even bother to be brought back to this country because of the costs involved and the life of the vehicles. Is that assessment being carried out by you at the present time, or by both of you?

Major General Dale: There is a combinational activity here. There is no doubt that the best way of conditioning equipment is to do that first hand in theatre so that you have early warning of what state the equipment is in and early decisions can be made about where the equipment is to go and what is to be done to it. It is not until that early conditioning exercise has been conducted that we can then work out the sequencing of events and what equipment goes where. There is a great deal of work being done between my staff, the Permanent Joint Headquarters, the DSG and other stakeholders in that process to map that out and that is work that is ongoing.

Q62 Mr Hancock: DARA's rotary and components element was partly sold off because they were simply overwhelmed, it would appear. Do you share that view that one of the reasons behind the sell off was that DARA could not actually carry out the necessary work in the timeframe that the Ministry wanted and consequently it was better to offload it. My second part of the question is, if that was the case then have you recognised anything in your time now as being head of the Joint Operation which could quite easily be overwhelmed and you would find it difficult to cope with?

Mr Hughes: In relation to the first part I would say no; that was not the reason why we sold the helicopter business. I would have managed the capacity of that business to do what was the customer requirement. That is business; that is what we do. So it was not "Vector now owns it, we will be doing what they do"; we would be doing it whatever the requirement was. You have to remember in the helicopter business we doubled the size in two years. It would be harder to double it again but we did what was necessary to do. In relation to the now DSG business, I do not see areas where we could not deal with the currently envisaged future capacities that are coming our way. That is why we work very closely with every element of the General's IPTs; we work with the land command people to get a view on the workload going forward. We need a decent sight going forward to enable to react. We can move relatively quickly but you cannot do massive amounts of extra work without some degree of notice and that is why we have regular meetings at every level of the business to look ahead in sufficient time to manage that capacity. So I do not see problems in my current capacity.

Q63 Mr Hancock: Taking that point of looking ahead, do you see that your organisation will remain profitable if the level of operations of where you are a fundamental part were to decline to an extent where you could see the business profitability being threatened?

Mr Hughes: At some point or other if the workload disappeared then obviously the profitability of any business gets affected but we will match the capacity of my business to suit the workload that is there and provided I have the notice and the time to do it I will be able to hopefully match the capacity and the cost of the business to the revenues to retain the profitability that is required in the business. That is just part of my planning process and getting enough sight ahead to do that. The only other major difficulty is if the workload disappeared very quickly, because you are not then going to have the ability to smooth or attack your costs to the same extent as the workload. But I certainly envisage us managing the business to achieve the required profitability going forward in the current version of the five-year plan I am working on to give to ministers later this year.

Q64 Chairman: So you will not be overwhelmed in capacity terms even though the Ministry of Defence has still not decided in its timescale for recuperation of equipment?

Mr Hughes: Yes the planning horizons are enough for me that if and when there is a spike, if that what happens, I would you be able to take whatever action necessary to address the spike and smooth it to deal, one with my capacity, and two to deal with the output that the customer requires. If it becomes a problem and the spike comes unforeseen and we have not noticed it, I do not envisage a situation where we will be given a surprise in relation to the amount of work that comes via recuperation. Some of it might be done via deciding with the General and his team about prioritising some of the more priority stuff and the higher priority stuff and you will flex timescales and some stuff to meet the high priorities.

Q65 Mr Hancock: Can I ask then what work is being done on getting this timeframe for recuperation solved, from both of your points of view? From the Army's requirement for equipment and your ability to carry out the work? Where is the synergy there that actually allows that to virtually come from a position where you can say, "This is the timeframe now."

Major General Dale: Permanent Joint Headquarters is in overall control of that process and they have regular meetings with all of the stakeholders. My staff and Mr Hughes' staff are very frequently in forum with all those engaged, working out what the demand is likely to be and what the timescales are likely to be. We are constantly pressing Permanent Joint Headquarters to let us know sooner rather than later what the overall time frame is going to be.

Chairman: We will come on to this in just a moment, General Dale, if you do not mind.

Q66 Mr Holloway: In the papers you have sent us you described your staff as volunteers and it is oversubscribed to go out to the theatres. Can you add a little bit of colour, General, to that, as to how that works? Also do you consider your capacity to carry out these deployments to be a part of your main business or is this a nice add-on to what you are doing now because it is useful?

Major General Dale: Let me give you two examples of how it works. If there was a vehicle, for example, which one has deployed into a harsh environment like Afghanistan and once it has been used to its maximum envelope you often find that some elements of the equipment begin to wear fairly quickly, which is out of the ordinary, and you need to take in hand a rectification, a modification or a programme of repair. This is often driven by the operational demand to use that equipment, so there is a sense of urgency about it. In those circumstances - and it has happened on a number of occasions already - we are able to turn to the Defence Support Group who have the expertise and who are familiar with that vehicle because they go through base inspection and overhaul programmes with it. They are already trained; they are familiar with the requirement; they are in the mindset of the military and it is very easy and very quick for me to turn to the Chief Executive and ask for that assistance and deploy them fairly quickly. We would do that and we do it to solve a particular problem. There is another example in Afghanistan where the Permanent Joint Headquarters have concluded that it is probably wise now that we are moving into a campaign footing to establish an equipment support facility in Camp Bastion, and that is an ongoing process. That is going to need some expertise and knowledge from people like the Defence Support Group who are used to setting up production lines and managing the refurbishment and rebuild of vehicles, and to go to that location and to work out the facility layout, the facility requirement, the tool setting processes and practices. So again I would be using them on a sort of consultancy, if you like, to enable that project to go ahead.

Q67 Mr Holloway: So that is the equipment sustainability solution, is it?

Major General Dale: Correct, yes.

Q68 Mr Holloway: Can you please take us through about what that will do and how it will work.

Major General Dale: One of the issues is - and I have mentioned them earlier - where you find suddenly that an equipment has a particular point of failure, which is only highlighted by the harshness of the environment and the way in which it is being used. Rather than dribble forward capacity to address that particular problem it may well be that it would be more cost effective to undertake a broader modification programme for the whole fleet. Rather than bring that whole fleet out of theatre at great expense it is much more cost effective to address those issues in theatre. But that can only really be done effectively if you have the right capacity and capability in the theatre. Looking at the broad environment and the long term demands it makes sense from Permanent Joint Headquarters' perspective to establish this equipment support solution. This is probably going to take, I guess, up to 12 months to establish it and get it running properly, and then the sort of equipments and work that will be run through it will essentially be dictated by the style of operations and the state of the equipment at the time.

Q69 Mr Holloway: Will any of Mr Hughes' staff be helping out with tasks that - is it still called REME?

Major General Dale: Yes.

Q70 Mr Holloway: The sort of tasks that REME people might otherwise do?

Major General Dale: Yes. Bear in mind that this is going to be a static facility inside a secure compound. It is therefore amenable to being staffed and run by civilian components. That could be a combination of the Defence Support Group expertise at various stages of the project - in the early design stage, perhaps in some of the modification upgrade work on some of the equipments. It could also be forward support representatives from industry for a particular issue that we have run through. Let us say, for example, British Aerospace, who are the design authority for a number of our armoured vehicles, might decide to deploy forward support representatives to do that piece of work; or maybe to do an investigation on the particular point of failure on one of their equipments for which they have design authority. So it could be a combination of contractors, DSG and REME soldiers who are on hand and permanently there to make sure that the facility runs smoothly. So I would probably envisage REME soldiers being the backbone of it, supplemented and augmented as demanded by the requirement by DSG and industry.

Q71 Mr Holloway: Has there been a need for this earlier, in previous years?

Major General Dale: That is difficult to make a judgment because the operation is only really settling down into its campaign footing now. It is one of those environments that have changed continuously. When I was in Afghanistan three years ago, as the Brits were moving from the north to the south, we only had 3,500 troops there and the operational requirement was very different then to what it is now. You have to accept that the operational environment changes continuously, so it is difficult for me to say that it would have been a thing to do earlier.

Q72 Mr Holloway: Presumably it is more because you have lots of different bits of equipment from lots of different suppliers than that the stuff has become particularly knackered in recent months.

Major General Dale: There is certainly a change in the style of operations and in the nature of it as it was three years ago. When we first set out in Helmand it was very largely a light infantry operation, but when you look now the lessons that we have learnt and the equipment that we have procured recently and deployed, it is beginning to be an equipment heavy theatre. There are some quite large fleets of protective patrol vehicles there and we are just about to deploy some new tactical support vehicles; and we have improved the mobility of the Armed Forces in Helmand considerably. So the quota of equipment that is now held in theatre is radically different from what it was three years ago. So it is those kinds of developments in the nature of the operation and style of the operation and its demand that drive us into these deductions and conclusions.

Q73 Mr Holloway: Most of that kit has been through UORs so is this partly about how DSG deals with those, or it is mainly an industry problem, the suppliers?

Major General Dale: I am not quite sure I understand the thrust of your question.

Q74 Mr Holloway: You have had an awful lot of UORs and you have now set out the equipment sustainability solution; is that partly because you have so many UORs that DSG need to find a mechanism for dealing with it, or it is primarily industry's problem to sort out the problems with that equipment when it gets out there.

Major General Dale: If I were to be fair I do not think it is UOR focused. The UOR equipment that we deploying is all new and its reliability is generally quite good. The key here is older equipment like the Pinzgauer, for example, that has had problems with its hubs.

Q75 Mr Holloway: How old is the Pinzgauer, forgive my ignorance?

Major General Dale: Off the top of my head I could not tell you but it is quite a number of years old.

Q76 Mr Holloway: It was not ordered specifically.

Major General Dale: No, there is a balance of equipment in theatre so, for example, you have legacy equipments like Land Rovers-Snatch, Pinzgauer and RB11s. You have the Scimitar CBRT vehicle, all of which has been subject to urgent operational requirement add-ons to adapt it to work operationally effectively in that kind of challenging environment. So there is a great deal of work to be done on the fleet in the round and none of this sits still. There are always new things cropping up; there are always demands made on these equipments for which they were not necessarily designed, which need to be rectified. It is better and more effective to do that through the equipment support solution than bringing all these things back at great expense and trying to do them in the facilities offered by DSG or industry; better do it in the theatre.

Q77 David Hamilton: My question to Archie is more of a personnel question about the increased activity where your personnel are required to go out there. Do you have any problem with that? And is anybody penalised if they refuse to go, if they choose not to?

Mr Hughes: No, we do not have any problem with that at all. In relation to the earlier question, it is a growing part of what DSG do, to deploy forward, not just to Afghanistan and Iraq but we have a large team in BATUS as well, for example, supporting the fleet out there. The way in which we operate is that we seek volunteers from across the whole of the DSG portfolio and we get lots of people volunteering and we select them on the basis of their skills for the task in hand. Nobody gets penalised for refusing to go because they are volunteers in the first instance and not only do they volunteer to go but when they come back they volunteer to go again because they feel part of the Armed Forces and they feel valued with what they do and they like doing it. In actual fact yesterday we had CDM down at Bovington who presented seven Iraq campaign medals to DSG employees who had been more than once and were keen to go again. So I do not have any probably whatsoever.

Q78 Mr Borrow: You have already touched on the question of recuperation of equipment, Chairman, but what I would be interested in getting a reassurance on is that your organisation is intimately involved with the MoD in the current discussions and the current plans for bringing equipment back from Iraq and any possible turns to Afghanistan, and whilst you have mentioned that you can cope with any spikes presumably coping with any spikes is pre-determined on the extent of the consultation with the MoD on any future plans for bringing equipment back?

Mr Hughes: I can definitely give you that assurance. We are working very closely with the customer and looking a number of years ahead about the capacities that we jointly believe are going to come through DSG and we are looking at all the factors that affect the workload for me and the capacities, because some of what I do is if an oil tanker is turned around some of it is quick, and so we are working very closely with the whole customer community care across the range of IPTs to understand on a programme by programme, project by project basis exactly what the workload is, and that is absolutely in relation to recuperation and we need to understand that because we are here to provide that service to the customer and we do not want to let them down.

Q79 Chairman: You have made a few mentions of the Defence Industrial Strategy this morning. In November we heard from the defence industry that by and large they seemed to consider that the Defence Industrial Strategy is on hold. Last month we heard from the Minister of Defence Equipment and Supply that he considered that it was well on course and charging ahead. Mr Hughes, what is your view about this?

Mr Hughes: The Defence Industrial Strategy as it currently exists has a clear role for DSG. Although it was written when it was ABRO and DARA to my knowledge it has not changed; what we do as an onshore sovereign capability is cemented into the defence industrial strategy, and that was one of the pretexts on the setting up of DSG in keeping it in MoD ownership going forward, and it is one of the things in working with the customer base in furtherance of Defence Industrial Strategy that they look to contract with us where it offers the best value for defence and where it retains the capacity and capabilities that the Defence Industrial Strategy wish to remain onshore. From my point of view the Defence Industrial Strategy was and is a good thing and it enables me to have that contact with industry as well. So being a Trading Fund it gives me that linkage to industry and I talk regularly with industry and we are partners with literally all of the industry players. We contract to all of the main primes as well as direct to the MoD. So I do not see any difficulty in relation to the Defence Industrial Strategy at the version one. If and when version two comes out and we have an input to it and I am sure it will reflect the current status of DSG.

Q80 Chairman: The defence industry seemed to think that the Defence Industrial Strategy was a good thing as well, but they thought that it was not properly implemented because there was not a sufficient amount of money to support it. You nod because you acknowledge because that is what the industry said or ...

Mr Hughes: I am nodding because that might be the industry view. There has been sufficient money to fund my business, is what I am saying, but I can understand why industry might hold that view.

Q81 Chairman: How do you think that industry reacts to the notion of your being the preferred in-house option?

Mr Hughes: I think most of industry understands why we are the preferred in-house option because of the heritage and history and skill set that we actually have. I mentioned earlier that in actual fact most of what we do no one else does and therefore it is a natural event that will lead on to us being the preferred in-house provider, both strategically and operationally, and most of industry I deal with understands that and, as I mentioned a minute ago, I deal with all of industry - BAE Systems, GD and Lockheed Martin and all of the players, and they understand the role that we have.

Q82 Chairman: Preferred in-house option is not a phrase that appears in the Defence Industrial Strategy, is it? I do not think it appears in the Defence Industrial Strategy. Does it inhibit you from being competitive?

Mr Hughes: No, it does not inhibit me from being competitive; I am driven all the time by the General to be competitive. The major goal that we have as DSG is obviously our mission is to provide that maintenance repair, overhaul and upgrade service but we want to do it at the best value for defence, so we are absolutely driven to be competitive and some of that is driven directly via the MoD customer and some of it is driven via industry and by competition because probably in the order of 20 per cent of what I do I contract through industry as opposed to directly through IPTs. So I am driven to be as competitive as possible and I do not see anything in the Defence Industrial Strategy that does not. As a Trading Fund and as being retained as a Trading Fund in MoD ownership, one of the reasons for that was to maintain the focus on us being competitive and commercially competitive and enabling us to do some things that otherwise we might not be able to do.

Q83 Chairman: Do you think that industry feels discouraged at some points from putting in bids for work because they might think, "DSG are the preferred in-house option. Not much point in trying to put in for this work."

Mr Hughes: I have not encountered that so far.

Q84 Chairman: But would you encounter it?

Mr Hughes: There have not been any particular contracts where that has evolved. Where there are contracts with industry and industry are a clear player what tends to happen is that we align with them and we partner with them because we generate the best value by utilising what I am good at, what they are good at to get a better whole is generally the way it works. In my time at any rate there has been very little in DSG where there has been a head to head competition between us and industry.

Q85 Chairman: But are you not in a rather cosy position because the standing instruction number 20 from DE&S is that DSG's capabilities and resources should be maximised and the core capability and capacity sustained to ensure their continued availability to the MoD customer. In other words, Archie Hughes must continue to be in place no matter what. Is that not rather cosy?

Mr Hughes: I have answered and maybe the General can give you a customer perspective. We do not feel cosy at all in that regard. We have continual pressures the same as any other part of industry to offer the best value for money solution and we recognise that if we, in the eyes of the customer at any rate, have not offered a cost competitive solution they will certainly hold our feet to the fire.

Major General Dale: From my perspective what is really important is to maintain specific types of capability and by that I mean from our perspective the ability to switch priority of work at very little notice and to be able to deploy people wherever I want them to go, whether that is in an operational theatre or in a training organisation like BATUS, to be able to soak up the excess work that is generated within the Armed Forces when units do deploy and there is equipment left behind. That flexibility to me is absolutely vital and indeed the maintenance of the unique capabilities that DSG offers in the maintenance, overhaul and repair of our legacy equipment, and until such time as industry is prepared to take that on then I am focused on preserving that flexibility and capability and I certainly do not give Mr Hughes an easy ride. I attend every four months or so a meeting with his staff and I represent my customer base from DE&S and I am constantly pressing him on efficiencies, pricing regimes and outputs. So he certainly does not get an easy ride because I have plenty of work for him to do.

Q86 Chairman: Of course you are constantly pressing him, General Dale, but if his capability in some areas is unique how can it be competitive because he has no one to compete against?

Major General Dale: It is only unique I would hazard at the moment because industry is not in a position to provide it. If they were minded to provide it they could, but at a cost.

Mr Hughes: One thing to support it. Because of our position and the relationship the customer probably gets a greater sight of my cost base than otherwise might be the case and they have more scrutiny over, if you like, the way that my costs and my prices come together. They have the ability within the DE & S arena - there might not be an absolute benchmark like for like but they know industry better than we know industry because they are contracting with industry all the time - they have a feeling as to how competitive or otherwise our costs might be, and we certainly do not get a cosy ride.

Q87 John Smith: I am still not clear in my mind in terms of Defence Industrial Strategy. You provide capability where it otherwise does not exist in industry or you want to retain sovereignty for very good reasons, but is your role as a Trading Fund and an agency still to benchmark on quality and price to ensure that we have a competitive market out there, or has that role gone? It is not clear.

Mr Hughes: I still do that. As I mentioned earlier, about 20 per cent of what I do is contracted via industry at any rate. VC10 is contracted via BAE Systems as you know; a large part of the land activity, BAE is the design authority and we contract via them - Bulldog, for example. is a recent one where we contract via industry. Therefore we do still have to commercially contract and have commercial benchmarks. If we take the Sealand activity in terms of electronics there is a continual benchmark between us and industry and it enables the customer to leverage that Sealand capability to get reduced prices in industry and there are examples that they have where we have been between 25 per cent and 65 per cent cheaper in our electronics activity than similar quotes from industry for that work. So those things go on more or less in different areas of the business. That does not give me the latitude to increase prices elsewhere where there is not the same level of competition because the General gets a view of my total rates across the business. So we absolutely as a Trading Fund still have that desire to be lean, be cost competitive and commercially competitive such that the MoD gets the best value it can from me as a provider.

Q88 Mr Jenkins: You mentioned the Bulldog contract just now and I find that one difficult because you went into head to head contest against BAE and you did not get the contract - BAE got the contract. Then they turned round and said to you, "We would like you to become a subcontractor now." So they have the contract, they are going to take all the profit and they are going to shove all the risk on to you. With this lifelong provision are we going to see a scenario where I am going to be the main contractor, I am going to build something and then lo and behold I do not want to go with the heavy stuff at the front end and fix it and it goes wrong, so I have muggins to send their people in to Fort Bastion to set about a big works and they are going to sort out the problem, tell me what the problem is and I might send somebody out to say, "Yes, okay, put an extra sleeve on that" and then they go and do the work. So are you not being taken for a ride by industry here? They are going to cherry pick and dump you as a subcontractor with all the work they do not want; is that not the future for you?

Mr Hughes: No, I do not think that is the case at all. There are a number of things there I can pick up. Whatever the competitive regime was in winning Bulldog the skills that BAE bring to the Bulldog contract we do not have; they are the design authority and they have all that design capability that I do not have in DSG. Therefore if you are going to change an engine or do an armouring or do a whole suite of modifications to a vehicle, turn it into a Bulldog vehicle, I can absolutely see where the prime contract role within BAE Systems is there to do that. I can also see that where they have those skills I have the hands-on technical skills to do the physical work and because that is what we do we are skilled at that and we have the capacity and capability. I actually offer at the best value for money and cost that I can do that work cheaper than BAE could do that work. So the ultimate solution in partnering with BAE and Bulldog gets the best solution for the customer. I get out of it the workload through my factories to actually do the physical work; BAE get their prime contractor role in terms of engineering and the customer, through BAE, who still retain the risk as prime contractor - they do not pass the risk down to me, and that is not to say I do not do a good quality job - so the model of us being a partner with rather than a competitor to the likes of BAE, Bulldog is a good model of it working. Every Bulldog has gone out on time. Last year we had a ceremony for the 500^th Bulldog and we have now done over 600 Bulldogs in partnership with BAE, and I think from a DSG point of view, irrespective of whatever the competitive regime was whenever it was bid - when I was not around - it has actually been good for DSG. I think it is a model with one or two modifications that we can use on other potential programmes and I believe that the customer has had the benefit out of that.

Q89 Chairman: But have you not thought since then, "Why did it happen that way round? Why was it DSG that was the subcontractor and not DSG that won the competition and made BAE Systems the subcontractor?"

Mr Hughes: I do not believe we have the prime contractor skills.

Q90 Chairman: So why did you compete?

Mr Hughes: No idea; I was not here.

Q91 Mr Jenkins: You should look at the Post Office because the regulator there said that all the sorting could be done, could be cherry picked and the manpower they have can do the last mile, the delivery bit. It was not a good deal for them. Be careful when you are dealing with industry, you may not get a good deal.

Mr Hughes: I will bear that in mind next time.

Mr Jenkins: Believe me, I have been there; done it!

Q92 Mr Holloway: It is slightly the other way round to what Mr Jenkins was saying but also going back to what the Chairman was talking about. General, can it really be cheaper for you to subcontract to these guys to service TA Land Rovers than to get a local garage to do it?

Major General Dale: I cannot answer accurately because ---

Q93 Mr Holloway: Surely the answer is yes.

Major General Dale: It should be yes, I agree, but I cannot give you the details because I am not party to how that works. Again, one of the advantages of DSG is its local proximity to TA centres and the ability for DSG to understand the problems of the user and to be able to surge and to veer and haul its capacities as needed to.

Mr Hughes: If I could just add to that, there is a management task in putting the work out to individual Land Rover dealers and therefore there is a scale of having somebody manage it as a wider geographical contract. What I would say is I have a Land Rover and I believe Land Rover's rates are more expensive than my hourly rate.

Chairman: I have two and perhaps I will bring it along to DSG!

Q94 Mr Holloway: I do not know anybody who has a ten or 15-year old car serviced by a main dealer and I am just wondering whether or not in this great package of economies that you guys provide it might be buried in that as a fairly nonsensical thing because it does not make sense to me for you to take something on and to subcontracting the servicing of elderly Land Rovers, which is a pretty basic thing which could be done within 100 metres of the front gate of the TA centre.

Mr Hughes: But then the TA centre has to have the procurement skills and commercial skills and the administrative staff, etc. to manage however many events happen. So I accept your point because there are always individual cases where I am sure could go under the arches' garage - if you will excuse the pun! - to do the Land Rover servicing.

Chairman: It would fall short on the armouring, would it not?

Q95 Mr Holloway: They just do not have armour and this is the point - it is a very unsophisticated thing and I wonder whether in this mix there are lots of things that you are doing that are actually costing the taxpayer rather more than they need to.

Mr Hughes: That is something that we continually review to make sure we offer the value that the customer wants.

Q96 Mr Havard: The Trading Fund model that was set up, are we seeing this as a transitional status process? What further changes are we going to see to the DSG? There was a review, as I understand it, a synergy study currently taking place in work streams at Sealand, Stafford and Donnington and so on. So what is the change that is going to take place because I hear a lot of rumours from people in the unions and elsewhere that there are more changes to come? So changes to the commercial model or simply frictional changes within the organisational structure?

Mr Hughes: There are no planned changes to the Trading Fund model so we are not doing any work in relation to the Trading Fund model. The frictional elements that you mention are the continual review that we have of the business to make sure that we are effectively organised to deliver the output at best value. So the synergy study I mentioned earlier, we are looking to make sure that we are making best utilisation of the assets currently under our control. We are looking at the capacity and capability of the business going forward; we are looking with the customer to see what the future workloads are by product, by geographical area, by business. Like any business we have to react to a changing environment, hopefully in advance but certainly as it happens in a planning round. So I would say that DSG operationally veer and haul and shape to take account of the circumstances in which we find ourselves because we are trying to drive the business to best effect. But there is certainly no plan or activity in place at all to look at changing the commercial model of the Trading Fund model; but operationally I will continue to try to get the best out of the business.

Q97 Mr Havard: So the through life capability aspects that came out of the Defence Industrial Strategy and so on, you seem almost to be explaining a circumstance, for example in Camp Bastion, whereby, if you like, your activity in terms of rectification or upgrading things and maintenance of them at the frontline almost, but certainly in theatre is not going to be substituted for by the through life capability requirement that there is on industry. That is going to be done in concert with them rather than being substituted for.

Mr Hughes: I think there will be almost a contract by contract programme by programme basis for through life capability management. We are plumbed into all of the discussions on a product by product basis for that and there is no one size fits all solution for how you support equipment either in the UK or in operation. Where we are is that we are well connected to that network as an expanding network of support solutions and are well positioned within it.

Chairman: Thank you very much indeed. I would like to finish almost as we started by thanking you for your crisp answers to the questions. It has been a very interesting session and extremely helpful.