Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  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.


  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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