Examination of Witnesses (Questions 120
WEDNESDAY 28 MARCH 2001
TEBBIT, CMG, MR
OBE, AND SIR
120. I think that is a very useful way of presenting
it. Would I be right in saying then that in these circumstances
while we strike one set of balances between the defence, the costs,
the political implications, it is entirely possible that our European
colleagues strike a completely different set of balances and that
they are prepared to incur much greater costs to themselves in
order to achieve political advantage or political gain or political
progress? I ask that in the context of these paragraphs being
written all in the context perhaps of a Europhile perspective.
I do understand that there are Euro sceptics that exist in this
country. Were you looking at the political gains from a Euro sceptic
perspective, you would take a somewhat different view, would you
(Mr Tebbit) Can I come in on that because the fact
is that by and large European procurement expenditure is so low
that I do not care what the reasons are for them to be improving
it: they need to improve it by so much that there is so much to
be done in order to get the military capability there that the
issue of whether they are just doing it for political or industrial
reasons does not arise. Long before that consideration is the
first factor: there is a military gap to be made up. There are
large capability gaps in the European defence posture which are
now being addressed through the European Headline Goal process.
Some European countries are beginning to increase their defence
expenditure but essentially we all need to do more in order to
meet the obligations we already have. In a way I do not mind what
their original motivation might be. The more they put into defence
industrial co-operation the better.
Mr Davidson: I appreciate that. I was absent
at the beginning of this meeting on matters to do with the election.
We take a different perspective on some of these matters.
Chairman: Several different perspectives.
121. Indeed. Self-preservation is common to
us all irrespective of party. While appreciating the point that
there are gaps to be addressed in the European stance, the fact
that there are a variety of ways of filling these gaps and one
of them has political implications is clearly an issue that it
seems to me is not being adequately addressed by yourselves. Would
it be right to say that if we were really going to have combined
European forces then common equipment provision would be essential?
(Mr Tebbit) Since that is not the objective I think
the question does not quite arise in that form. I am not trying
to be evasive but you may be driving rather further down the particular
direction than is the reality. For example, I would expect there
to be wide European interest in the Joint Strike Fighter. It is
not just the United Kingdom that is interested in that. There
are a number of European countries which are also becoming partners
in that project.
122. I do not want to go down that road. I just
want to be absolutely clear. You spoke about gaps in our provision.
Is it not correct that with the forces and the money to be spent
in Europe, if there is going to be a European force, whether it
is an army or anything else, it would make much more sense to
have common equipment provision? Common equipment provision is
obviously a step which makes that aim much more likely or possible.
(Mr Tebbit) This is where I just have to say what
the Government's policy is. The Government's policy is that it
is not going to create a European army or support the creation
of a European force. It is supporting the strengthening of European
capabilities that could be available essentially to NATO within
the framework of the Alliance and which could also be used by
the European Union to underpin ESDP, European Security and Defence
Policy. You know the policy so we are not at the pointI
am not going to march off with a European army.
123. Yes, yes, yes; not in front of us anyway.
I understand that. Could I ask about the gains of collaboration
because it does strike me that in terms of Britain having collaborated
with a European partner on Airbus, the fact that it is built in
Toulouse has resulted in enormous benefits to the French aerospace
industry because of the concentration of industry that then went
on in a roundabout way and people were attracted in and there
is really a centre of excellence now. What guarantee have we got
or what awareness is there within your own organisations that
we need to make sure that we are not always losing out in these
circumstances? Collaboration is fine, but collaboration has to
take place generally somewhere and if all the final delivery points,
the assembly of the aircraft, are somewhere else, then while we
might get a cheaper aircraft than might otherwise be the case
we are not necessarily going to get the spin-offs that other people
are getting. What steps are we taking to make sure that we are
not being robbed blind?
(Sir Robert Walmsley) That, if I may say so, is where
juste retour comes from. Every country in Europe is determined
to make sure they are not being robbed blind. That is why you
end up with work shares being calculated to the second decimal
place. If you do that the article that you are trying to procure
will cost more than it should do, and that is a tax on defence.
The purpose of OCCAR is to get away precisely from the precision
about work shares that have bedevilled collaborative work for
years. In order to recognise the reality of life, that unless
there is a reasonable return to each nation in relation to their
expenditure, OCCAR is trying to set up this arrangement called
global balance where you take swings and roundabouts. If you do
not get your share on one programme, the next time you are in
a programme you so to speak arrive with a credit point. We have
got to get away from the precision of juste retour that
was applied to the frigate programme. It results in everything
bigger than a biscuit tin being made in those percentages. It
is hugely inefficient.
124. I understand the concept of juste retour.
Indeed, in Pollok they speak of little else.
(Sir Robert Walmsley) Not when I was there.
125. That is not quite the point I was making.
It is not just a question of work sharing. It is also a question
of the development of centres of excellence and so on, which is
much more difficult to define, much more difficult to measure,
because it is the spin-offs. I am not entirely clear from what
you have just said, nor from what I read here, that we are getting
our fair share of returns. It does seem to me that, like so many
things European, we contribute and others do not quite play the
game in the same way.
(Sir Robert Walmsley) We are getting our share on
Eurofighter of the high end technology work. You only have to
visit Warton, which I very much hope some day you will have the
opportunity to do, to understand that.
(Mr Tebbit) The only other thing I would add is that
if you look at what is the profitable bit of Airbus you will find
that British Aerospace, with 20 per cent of the interest, is the
one with by far and away the largest profitability and that does
matter, especially when we have got low unemployment. It is going
to the areas where they are making the best return.
126. I would like to pick up two further points.
The first is the question of multinational companies. I recognise
the extent of national collaboration but, having had some discussions
over a long period with Rolls Royce and seeing the pattern of
risk and reward that they developed, what lessons have you learned,
or are there other lessons that you believe we can still learn,
from the way in which many of these multinational companies are
striking the same sorts of balances that you are seeking to strike,
not necessarily on juste retour, but on risk and reward
which is basically the sharing of costs and so on and sharing
(Sir Robert Walmsley) I think they are hugely important
to collaborative procurement. What governments need to do is to
keep their fingers out of the detailed workings of the companies
and insist that we get a good price, and make sure that the companies
are not hindered by government regulations from delivering an
efficient outcome. Matra BAe Dynamics is a very interesting example
of a company that is doing just that.
127. The final point I would like to raise is
on RO-RO's which was raised earlier on and the PFI and the complexities
of European procurement. Then I noticed in the press recently
that the six-ship order having gone to Weir who are going to build
four in Flensberg and two in Harland and Wolff, lo and behold
the MoD are just now buying two directly from Harland and Wolff,
which seems to have torn up the whole concept of PFI. If you have
that flexibility in these circumstances does that mean that much
of what you are telling us about the rigidity of the rules and
the rectitude of the programme on disposal is unnecessary?
(Mr Tebbit) No, we are not saying that. Firstly, it
is not a collaborative programme. I take the point that that would
be a narrow and churlish way of trying to answer your question.
The service is I think for 20 years and so the element of these
two ships that you refer to is but a tiny fraction of the totality
of the service that Weir are going to be delivering for the Ministry
128. So that is all right then to change these
rules in an environment of procurement directly?
(Mr Tebbit) No. I was just answering the point about
undermining the PFI. It still is very much a PFI project. Ministers
took a decision as to which way they would go based on their own
judgments of value for money and on speed of delivery. One of
the key elements in this for us was to be able to get the ship
in service as fast as we possibly could. They judged that it was
desirable to go down a route which funded the two ro-RO-RO-ROS
that had already been, by fair and square competition, won by
Harland and Wolff, rather than to go down a different route which
would have caused more delay.
129. Could I just clarify this point? I recognise
your generosity, Chairman. It seems to me that a PFI was established
with a complete set of structures with financing in place and
all the rest of it, an assessment was made, but it then was discovered
that that did not work because it was going to be delayed unless
it was changed, and it was changed, and the whole deal effectively
was unpicked. If I understand the ministers who took the decision,
they took the subsequent decision because the first decision obviously
was not working. Is that not somewhat unfair on the other bidders
and does that not demonstrate that there is a rare degree of flexibility
when it suits the MoD?
(Mr Tebbit) I am not sure there is a rare degree of
flexibility but ministers were satisfied that this was the right
way to go in order to deliver the final outcome. I think the Chairman
130. I want to go on to the matter of exploring
generally the macro background for the policy you are operating
over the next four to eight years which coincides with the term
of office of the US President. Most of these projects are long
or very long lead projects and therefore very vulnerable to political
whims in participating countries. You made the point that the
US has been more helpful in recent years. How far until this helpfulness
had we been obstructed in developing joint ventures and co-operative
ventures with the Americans because of the US law and US policy?
(Mr Tebbit) We have always had very major collaborative
programmes with the United States but the trade as it were has
been rather heavily in the United States' favour. We have certainly
been able to acquire a great deal of equipment from the United
States through those routes and the report sets out in some detail
a lot of that. The main point is where we are going to be going
in the future with the United States. As I say, the Declaration
of Principles is an important milestone in providing a more balanced
playing field. British companies in the United States should get
exactly the same treatment as American companies get in Britain.
131. When was that signed? I have forgotten.
(Mr Tebbit) The Declaration of Principles was signed
last year in about March at the Wehrkunde Conference in Munich.
I remember being there at the time. It was one of the great moments
of history of signing ceremonies. It was signed between the Defence
Secretary and his US counterpart. That will help. What also will
help is the way in which industry has moved. I am not sure if
you were here when I was explaining earlier that 30 per cent of
BAE SYSTEMS' profits last year came from US customers, bigger
actually than the Ministry of Defence in the United Kingdom. The
way in which trans-national movement has occurred in big defence
companies is also locking us in a transatlantic two-way street
much more firmly than we have in the past, and it is British companies
that have been most successful in the USRolls Royce, BAE
SYSTEMS and indeed Smiths.
132. One of the things which concerned me and
obviously would concern you is that the agreement you are referring
to on which you are basing so much was signed towards the end
of the Clinton administration and we now have the Bush administration
which has very different emphases.
(Mr Tebbit) We have had confirmation that they intend
to continue the process with the new administration.
133. That is what I want to explore further.
Has there been any change in emphasis at all that you have seen
in relation to approaches to co-operative development?
(Mr Tebbit) I cannot answer that precisely because
of course the new administration has come in and is doing a review
of all its programmes. They have not yet produced a result so
it would be wrong for me to say that I can be absolutely clear
about how it is going to go in the future. But there has been
no evidence that they intend as it were to weaken their interest
in co-operation with the United Kingdom; quite the reverse. I
was in Washington last week with Geoffrey Hoon when he met Don
Rumsfeld and the rest of the administration and there was positive
commitment to moving forward, although we have not got agreement
on individual projects at this point because they are all part
of the review that the US Administration is conducting.
134. The American delegation to the NATO Parliamentary
Assembly circulated a document before the election in the name
of the Republican leader, in which they said that the general
trade disputes that were developing between Europe and the US
were actually now reaching a stage where in their viewand
this document is on recordthey were threatening the coherence
of NATO. That seemed to be a rather overheated statement but it
has been returned to on several occasions, on almost every occasion
that they have had an opportunity to raise it. Do you see anything
at the administration level which suggests that there are concerns
to that extent?
(Mr Tebbit) Not as extreme as that but I think you
are absolutely right that we need to worry about the possibility
of trade disputes between the European Union and the United States,
not beginning in the defence field at all, but clearly those sorts
of things can sour the atmosphere. Bananas is a real problem.
135. Of course they are so much more vulnerable
there to industrial lobbies than we are in this country. A congressman
is elected for two years. On day one he wins the election; on
day two he sets up his fund raising committee and he has a target
that he has to achieve each week, otherwise he has got nothing
to fight the next election, so they are beholden to their industrial
(Mr Tebbit) But I cannot remember a time when we have
not had a trade dispute between the United States and the European
Union and, as I say, the recent co-operation was developed during
the height of the banana war, if I can call it that, and other
problems. These are constant frictions in the relationship and
we need to make sure that the defence collaboration survives through
136. The other questions I have it is probably
too early as yet to have any answers on.
(Mr Tebbit) I cannot answer on the outcome of their
review on JSF, for example.
Chairman: In that case it remains for me to
thank you gentlemen for coming again and giving evidence. It was
a very interesting area which will no doubt become more important
in the coming year.