Examination of Witnesses (Questions 40
- 59)
TUESDAY 23 MAY 2000
SIR ROBERT
WALMSLEY AND
VICE-ADMIRAL
SIR JEREMY
BLACKHAM
40. Yes, please.
(Sir Robert Walmsley) I am afraid I could not. I shall
try to explain why. I should preface my remarks by emphasising
that this was a very tough competition. The companies, as well
as us, invested a lot of money in it. Part of the process of concluding
the competition is to give a very formal debrief to the loser
and the winner if they want. We have not yet undertaken that process
with the loser, but I can say, just to set the scene, that from
the moment it was decided that we were in a position last Tuesday
to make this announcement, the first company I telephoned in the
United States was Raytheon Systems Limited, the losers. I am really
emphasising the great importance I place on not announcing in
this room now, before we have had a chance to tell Raytheon, what
their position was in detail. Just to come back to the substance
of the point, two missiles, the Raytheon FMRAAM and the Matra-BAE
Dynamics Meteor. For various reasons we concluded that Meteor
was preferable to the Raytheon FMRAAM. We had also asked both
bidders, if they wished, to propose alternative strategies for
reaching the full capability set out in what is called rather
grandly Staff Requirement (Air) 1239. By this, we were intent
on explaining to them that we could look at an evolutionary strategy,
one where they provided a missile with an interim capability which
could later be upgraded. Essentially this became known as Extended
Range Advanced Air-to-Air Missile, ERAAM, and it had a little
plus on it to show that it had a little bit more development work
than the United States had then envisaged. We were going to share
the development costs associated with producing this missile to
an intermediate capability with the United States Government.
Because we then had preferred Meteor to FMRAAM, the full capability
missile from Raytheon Systems Limited, we were essentially looking
at the cost of an ERAAM+, that is the intermediate capability
Raytheon missile, plus some extremely difficult to estimate costs
to bring ERAAM+ up to the full SR(A)1239 compliance, against the
Matra-BAE Dynamics Meteor which went full way to total compliance
ab initio. On that basis, Meteor is cheaper. But of course
if you choose a missile which is not of such great capability
it is hardly surprising that that is cheaper. However, we were
not wanting that. We wanted to know how we were going to satisfy
this requirement. We were not going to draw stumps half way through.
I have described it sometimes as saying that if you want to get
to Birmingham you can start off down the M3 towards Southampton.
It works but it is not a sensible proposition. We wanted the full
SR(A)1239 compliance.
41. It seems to me that is quite a solid statement
to say one of the contractors was on the wrong track basically.
(Sir Robert Walmsley) I do not think I did say that.
I think what I said was that they both put in fully compliant
bids. FMRAAM from Raytheon Systems Limited; Future Medium Range
Air-to-Air Missile is quite clever really because it was originally
the title of our staff requirement and they stole it as their
proprietary title so we had to change the title of our staff requirement
to BVRAAM—against Meteor. We preferred Meteor to that for
reasons which I shall go into with Raytheon but they deserve that
courtesy first; there were technical issues associated with that.
We had offered them both an innovative route. Matra-BAE Dynamics
did not choose that. They said they wanted to go the whole way
in one step. Raytheon offered us an intermediate step, sharing
the development costs with the US Government. A second step to
bring that missile up to full compliance in due course was something
we never felt terribly comfortable with and we certainly never
knew exactly what the costs were.
42. You give me some difficulty here because
presumably then you find it quite a problem to go on to explain
what the tradeoffs would be between the two different systems,
if you are unlikely to share with us why you believe that the
Raytheon solution is not correct, and that is something we should
really like to know, how you came to your decision.
(Sir Robert Walmsley) I did explain that the intermediate
route was more expensive. I did not explain, but I did say there
were absolutely solid reasons why, if we wanted full capability
the Meteor solution was technically far better than the Raytheon
Systems Limited solution. I really have to go into that with them
before I go through the detail of that with you. It was conclusive.
43. Clearly you are comfortable with the decision,
Sir Jeremy?
(Vice-Admiral Sir Jeremy Blackham) Yes, I am. I am
not sure that I can add very much more. The requirement we set
is a requirement which is based on both the aircraft we have and
the missile we are acquiring. The same is true of the Americans.
They are looking to integrate their missile with a completely
different aircraft; incidentally with a stealth aircraft. The
missile type they require is, not surprisingly, different from
ours. They do not have a requirement for a missile as supplied
in SR(A)1239. It is not to my mind deeply surprising that they
have no plans to make one. Obviously it is Sir Robert's judgement
as to which is the best route, but I have absolutely no doubt
that in this case the direct route is the one most likely to produce
the right answer.
44. We assume that the Meteor is more expensive.
We are assuming that as a committee. Does that mean therefore
that having chosen Meteor we shall have fewer missiles to stay
in budget?
(Vice-Admiral Sir Jeremy Blackham) As I am sure you
know, the proposal is to buy an interim missile until Meteor comes
along. The combination of the two sorts of missiles would have
been different under each proposal because of the capabilities
which are provided by the different missiles. We shall be providing
the number of missiles we have calculated that we need.
Chairman
45. Sir Robert, we should like to take you up
on your very kind offer—I think it was an offer—having
made the debriefing to the contestants. I tell you why I ask.
In my study of defence committees around the world we are one
of the very few which has no formal role whatsoever, apart from
whingeing after a decision has been made when it has no influence
at all. It would be really helpful if you could, in a private
briefing if you wish, explain the process that the Ministry of
Defence went through. We have charts which give us the process
in outline but it would be really helpful if you could tell us
how this project began and how it wended its way through the process
and the key decisions that were made. I can understand the sensitivity
on price; a company would not necessarily want to endanger any
other bids it might have by stating an offer it made to the United
Kingdom. It would be really helpful and we look forward to having
a meeting. A question following on from that and this must have
been a factor in your calculations. What would have been the long-term,
potential consequences for UK industry and for the wider European
missile industry had the Raytheon missile been selected? How did
this factor weigh in Meteor's selection? I am sure Raytheon put
in a very good bid which would have created jobs. Whether this
is for now or for later on—I suspect more now than later
on—could you give us some idea of these industrial factors,
employment factors?
(Sir Robert Walmsley) I shall start with the industrial
factors and then I shall move to employment. We have about half
a dozen parameters which we look at when we look at the industrial
issues associated with a defence procurement. I am sure you remember
that these were concluded several years ago now in the wake of
a joint Department of Trade and Industry Select Committee and
Defence Select Committee report. I think that sets out these six
factors. Essentially some of them are about making sure that we
can deliver, maintain and improve the capability. That is: will
the industry be able to deliver the requirement, will it be able
to support the missile—we need our hands on support—and
probably in some ways most importantly, will the industry be able
to improve, modify, update, manage the evolution of capability
through the life of the missile? Those were three of the issues.
We then quite systematically addressed the point that with most
modern high technology large development content programmes they
are going to be collaborative. If you do not have an industry
capable of holding up the national end in this, you can quite
easily be taken to the cleaners. Essentially a collaborative programme
becomes an offshore purchase. Do the fourth factor would be: how
do we make sure that we maintain an industrial competence which
would allow us to enter into future collaborative programmes?
Exports are a non-trivial matter. This is not just about the political
cohesion, the interoperability which comes from successfully selling
advanced defence equipment to other countries. It is also a direct
thing about reducing the overheads to the cost of the UK missiles.
It is also about the export levy which we charge for the fact
that we pay to develop these missiles, so there is direct financial
benefit to the Ministry of Defence. Then we come to skills and
jobs. I have set out the basis on which we want these skills,
maintaining competences, collaboration, etcetera, but there is
no question about it: the government as a whole, and I do not
want to suggest I am a great expert in this, but you do not have
to be an Einstein of economics to work out that these are just
the sort of jobs which have a huge trickle-down effect in terms
of the technical competence of the people involved. There is no
doubt that a missile developed like Meteor in Europe will attract
higher quality jobs to the United Kingdom than a Meteor like ERAAM+
developed jointly with the United States Government, with a lot
of work, not all work by any means but a lot of the work, being
done in Tucson Arizona I should think, the home of Raytheon missiles.
The result of all that was not only were there more jobs in the
United Kingdom, some 1,200 associated with the Meteor bid, but
they were also higher quality. Raytheon said 930. It sounds a
rather precise figure to me but they have been exemplary, I have
to say, in following through on their commitments with Astor and
other programmes where they have been our preferred contractor.
That was what they said would be created in the United Kingdom
for the ERAAM+ bid but not quite such high quality because a lot
of the development work would have been done overseas. Those are
the types of industrial factors we took into account directly.
I apologise for making this rather a long story, but Matra-BAE
Dynamics of course is a company which has very strong roots in
the United Kingdom and France and now in Germany. I brought this
very large piece of cardboard with me in case anybody asked me
about the European industry. That is the cross-shareholding in
the European defence industry today.
46. I cannot see Walsall anywhere in there.
(Sir Robert Walmsley) I am sure it will be there.
The point I am trying to make is that this is an unbelievably
complicated situation. All of that, everything in my hand now,
will unravel if it does not have work, if it does not have programmes.
If you want to maintain this competence, you have to think very
seriously about the consequences of deciding to place defence
contracts outside that industrial structure.
47. May we have a smaller version of that, or
you could leave that behind if you wish?
(Sir Robert Walmsley) I am very proud of it. I shall
keep this but I shall give you a smaller version.
48. How significant was the need then to be
able to export Eurofighter fitted with BVRAAM missiles? How importantly
did this feature in your assessment of the BVRAAM competition?
Linked to that, had you received cast iron guarantees from the
US that they would not have impeded a Raytheon BVRAAM being included
on exported Eurofighters?
(Sir Robert Walmsley) I indicated that we did look
at exports as well as the industrial factors. Of course there
is a very important connection to the far bigger Eurofighter programme,
as you make explicitly clear in your question. Yes, it did matter.
First of all, because Meteor itself will be developed in concert
with European industry, we have to be quite clear that we are
not building ourselves an impediment to Eurofighter exports through
that. It will not have escaped the Committee's notice that the
BVRAAM partners are indeed the Eurofighter partners plus Sweden
and plus France. It is no coincidence that those six countries
are the six countries who co-signed the letter of intent describing
greater cooperation of European industry and of course defence
exports are part of that. The MoU itself includes the standard
clauses about facilitating exports to respectable allies. We think
we have very good assurances. I always worry about cast iron for
the future but it is as near cast iron as we can have in relation
to Meteor and exporting it on Eurofighter. The situation with
the Raytheon missile is of course very different. There is no
question that the United States Government absolutely understood
our concerns on this point. They gave us very strong assurances
that they would have no difficulty, in the future allowing exports
of ERAAM+ to those countries to which they were currently persuaded
to allow themselves to export AMRAAM missiles, the grandfather
of ERAAM+. That assurance was hugely welcomed by my Secretary
of State and of course by the Government. It is of course the
future we are talking about. The degree to which those assurances
can be regarded as cast iron is something which one just has to
be a little bit cautious about. I have no doubt that they were
made with the intent of making us very comfortable on this point.
At the same time subsequent administrations are not formally bound
by such assurances, or things can happen, and the big worry at
our end was what would happen if a Eurofighter armed with this
missile was in competition with the United States combat aircraft
armed with a missile wholly under their control. Yes, we might
have had export clearance. Would it have come as quickly as the
other one? We do not know. We do know that predicting the future
ten years hence, when there are such huge commercial pressures—huge
commercial pressures—is something one wants to be responsibly
cautious about.
49. On the question of huge commercial pressures,
the French are on both sides of an argument, which is a good position
for them to be in in some ways: competition between Eurofighter
and Rafale. What about the problems there? Can you imagine not
the Americans applying political pressure but our French colleagues
applying political pressure for Rafale or Eurofighter?
(Sir Robert Walmsley) We spotted that. It is of course
a very sensible, if I may say so, point. You have just forced
a question. What would really happen? This is where I so much
welcome the fact that Matra-BAE Dynamics is a solid French company,
as well as a UK company, as well as a German company. We have
obtained assurances from the French Government which seem to give
us great confidence that they would find it inconceivable that
they would withhold exports from this UK/French/German company
in order to further some other interests. I cannot guarantee of
course but we found that thoroughly believable.
50. Would that apply to the aircraft as well
as the missile?
(Sir Robert Walmsley) If they do not sell the aircraft,
we could not sell the missile. The formation of EADS, the European
Aeronautics Defence and Space company may not have many advantages
in the United Kingdom, but one of the things it does is tie the
French aircraft industry very closely to the continental European
components of the industry which are manufacturing Eurofighters.
Everything will be pointing in the right direction and we felt
pretty comfortable about it.
51. Do the French feel pretty comfortable with
it?
(Sir Robert Walmsley) They say so. We work with them
all the time.
52. I can imagine a scenario where, because
of a French linkup with DASA, they have a vested interest in Eurofighter
and they have a vested interest in selling their own aircraft.
There must be an occasion when people are going to be considering
the British option, the French option, the Russian option, the
American option. What kinds of pressures would you envisage the
French to be under if the purchaser then goes for Eurofighter
and not Rafale? There must be a considerable set of pressures
upon the French in supporting a bid in which they are on both
sides of an argument.
(Sir Robert Walmsley) I completely agree. That is
why we concluded that the advantage of Matra-BAE Dynamics having
a significant French stake and therefore being able to argue from
the inside was very important.
53. You think this is a major argument. Are
there no other arguments which might go in the other direction?
(Sir Robert Walmsley) EADS is a major argument. The
arrangements we hope to secure inside EADS for ensuring that there
is no suggestion of a conflict of interest within that company
about deciding which aircraft they choose to invest more marketing
resources into, for instance, is something which we are spending
quite a bit of brainpower on at the moment.
54. We shall come back to you later on that.
It will be some time before that kind of decision will be made
but it will be quite interesting if somebody picks up the kinds
of arguments which have been given.
(Sir Robert Walmsley) The situation in EADS, if I
am not labouring the point, is a much bigger and much more significant
problem than the missile issue because that is direct.
Dr Lewis
55. The Secretary of State has told us that
his selection of Meteor is "... subject to formal confirmation
of commitment by our partner nations ... to a collaborative programme
sharing the development costs". Does that mean that we will
proceed with Meteor only as a collaborative project? How big a
share of the total programme will have to be picked up by other
countries in order to make it financially viable?
(Sir Robert Walmsley) The Secretary of State's words
were very clear: it is subject to securing formal commitment from
other countries. It would be a moot point if we failed to secure
the commitment of a country which was taking less than ten% as
to whether the programme would go ahead or not. My instincts would
be that the programme would go ahead. Whether we need them all
is completely different to whether we need any. We certainly need
some.
56. May I ask you to quantify what our minimum
requirement is?
(Sir Robert Walmsley) No, I do not think you could,
because I am going to be negotiating this with my colleagues in
five other countries. The idea that I should set down here what
my drop-dead number was would not seem to me to be a frightfully
sensible thing to do. I am going on to talk about numbers though,
if I may? The point I should just like to emphasise is that it
would be wholly unreasonable for the United Kingdom to expect
other countries to commit to this programme before the United
Kingdom made the commitment. What we did was write to the other
countries, very formally, at the beginning of December and ask
them to set out their commitment to this programme as they planned
it. We received those letters back. It took some time but we got
the letters back during January and February. The last country
to reply, interestingly, was Germany. The first country to reply
was Spain. In between we secured the others. We have been through
a very difficult period with Sweden and the defence review. All
these ducks are nicely in a row. We have an MoU well through negotiation
now, which we plan to sign this year. Some countries, unlike us,
are not prepared to commit to the production phase following development
immediately at this stage. So some very complicated option prices
have been introduced so that we get the benefit of the bigger
orders later on if they materialise. The key thing we are sharing
here is the non-recurring costs on development. If matters go
as we currently think they might, then roughly speaking somewhere
between 30 and 40% of the development work will be undertaken
in the United Kingdom, somewhere between 20 and 30% of the development
work will be undertaken in Germany and somewhere around 10% or
less in each of the four other countries. That is how we are seeing
the offtakes and the expenditure contributions panning out. Let
me emphasise though—perhaps I have been slightly careless
in talking about "workshare"—that there is no
directed work. We are not saying this country will make that bit.
We are saying we expect MatráBAE Dynamics to deliver industrial
participation amongst the six partner nations broadly along the
scale I have indicated.
57. Did we in any way adjust our consideration
of the BVRAAM bids to reflect the priorities or concerns of the
other five countries rather than our own?
(Sir Robert Walmsley) We did not adjust the performance
we sought from the missile. We have adjusted the work management
arrangements and these are ground breaking, as they so often seem
to be on new projects. The project is planned to be run from Abbey
Wood, Bristol, by the Defence Procurement Agency. We shall have
representatives from each of the other nations, more than one
if they wish, within the project team. The UK, which is making
a firm commitment to both development and production, will be
a pilot nation, meaning we are, not to beat about the bush, going
to be in charge. But the arrangements in the MoU permit total
transparency with these partners, permit them to influence our
management decisions and I am very happy that we have concluded
those on a satisfactory basis. A year ago I could not have said
that; we had failed to do that. We have now secured that.
58. Now that we have made our decision in favour
of Meteor, is there any danger that if there is a time lag between
the making of that decision and the final signing of contracts,
because Meteor know that they have won, they could then shift
the goalposts against the interests of the MOD and in favour of
their own bargaining position.
(Sir Robert Walmsley) That is always a risk. I hold
enough letters from senior people in Matra-BAE Dynamics and their
shareholders to make me believe that it is not one which we need
to lose any sleep over. Of course I should much prefer to sign
a contract as soon as we announce it. That is a better plan. When
you have other countries and they cannot reasonably commit to
this and we have to sign MoUs, it is just too difficult. That
is why I hold these bits of paper.
Mr Gapes
59. You said that we are going to be in charge.
May I take you back from that? What are the arrangements for possible
future European collaboration after the selection of Meteor?
(Sir Robert Walmsley) Within this programme we are
going to govern the management of it by memorandum of understanding.
It will enshrine such arrangements as if somebody decides to change
their mind and walk away they bear the costs which fall to the
other participants, that type of thing. We shall have a memorandum
of understanding governing it.
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