Examination of Witnesses (Questions 1
- 19)
TUESDAY 13 MAY 2003
SIR RICHARD
EVANS, MR
NICK PREST,
MR JOHN
HOWE AND
MR COLIN
GREE
Q1 Chairman: Gentlemen, welcome.
I must apologise in advance because there might be a vote shortly,
the division bell will ring, and we will "do a Linford Christie"
and be back as quickly as we can. I must say that there is nothing
like a session on procurement to fill the room—with a group
of disinterested people of course! I think we do have some interesting
questions to ask so welcome to you all. I am not certain whether
you would all wish to answer the same question. If something has
been said, then please feel no compulsion to speak, but I suspect
you will all wish to contribute to individual questions. Firstly,
why was there a need to set down the Government's Defence Industrial
Policy and what difference do you think it is going to make?
Sir Richard Evans: I will come
to the question in a minute but, first of all, can I thank you
and the Committee for giving us the opportunity to represent the
Defence Industries Council. The possibility of silencing my colleagues
is nigh on impossible. I am utterly delighted at the fact that
I do not have to perform a Linford Christie myself to leg it off
to the vote. I hope you are all still here at the end of it and
manage to return! We think the whole issue of the Defence Industrial
Policy paper is one that is of enormous importance, not just to
the industrial side or the community here but also to the UK government
and therefore for the UK plc position. Why have we got it? I guess
at least in part the answer is because we have never had it before,
and we have over various periods of time argued that there needed
to be some process by which we were able to create what we would
like to see to be a pretty seamless focus on a number of critical
areas in the defence scene, and I think over recent years it has
become more and more apparent to us as the inevitable problems
on budget distribution have been there to see. The fact of the
matter is that we have to spend much more effectively the money
that is entrusted to us through the contracting process from the
government in a way that clearly demonstrates both value for money
and product satisfaction. Those really are the principal drivers.
There are a number of issues that come out of that. I guess certainly
one of the major issues relates to technology and the way we generate
technology. The fact of the matter is in this country today we
have been living in recent years off a technology basket that
was created maybe 20 or 25 years ago and a lot of us would certainly
have the view that we have not been putting anything like enough
back into it simply in order to top it up without actually looking
at how we increase the amount of money we spend on technology
which seedcorns the products of the future. I and my colleagues
here really look upon the announcement that was made last October
by the Secretaries of State for Trade and Industry and Defence
as being something of an industrial triumph, if I can put it that
way, in that for the first time we had joint agreement on a number
of specific objectives that are within the policy document. I
have to say in my view that is the relatively easy part of the
task because setting this down on a piece of paper and getting
everybody to sign up to it is one thing, but I think the biggest
challenge now lies ahead of us, which is all related to delivery.
We have to have together with the government—because this
is a government issue not simply an MoD issue—a process
whereby we can deliver in clearly defined terms and indeed in
measurable terms the objectives that are set out in this paper.
I think that is where we all stand. We are committed to it and
the intention from the industrial side is to see this paper and
its objectives delivered. I am very happy for any of my colleagues
here to chip in.
Mr Howe: Can I add one small postscript.
There have been, as I remember from my own time in the Ministry,
some elements of an implicit industrial policy in place for some
time but I think another thing that is very helpful about this
new policy is that it is explicit. It will be much easier for
industry to relate to the MoD and respond to its needs if the
industrial underpinning of policy is clear.
Mr Prest: I have little to add
other than, in summary, our view is that the defence industry
is an important component of the national security equation as
well as contributing to the economy and it is for those reasons,
never mind our interest in running businesses, that I think it
is important that the government has given some explicit recognition
to this, as opposed to taking into account industrial factors
on a rather more ad hoc basis which has been done historically
individually procurement by procurement, and if anything the explicit
policy, picking up what my colleague said, over perhaps the last
decade had been to say there was not an industrial policy, whereas
the implicit policy was to have one but on an ad hoc basis, so
I think to put some sort of framework around it is a very helpful
step.
Q2 Chairman: What disadvantages did
the absence of an industrial policy pose for British manufacturing
companies? What disadvantages did it pose for the Ministry of
Defence?
Sir Richard Evans: I think that
the principal disadvantage that we have really created for ourselves
over recent years is a failure to harness at a very early stage
in the whole procurement process the total resources that are
available here in the UK. That therefore means that we do not
get the focus at the right point in time and to some extent therefore
by the time decisions are made we are on the industrial side certainly
behind the curve and then have to spend a hell of a lot of effort
in trying to get ahead of it, and in some cases we simply never
do. That is one of the key areas. My guess is that the second
area brings you back on to the technology argument. The fact of
the matter is that here in the UK we cannot afford as a nation
to invest in the wide-ranging technologies that we were able to
enjoy in years gone by. We therefore have to be much more selective
about how we deploy resources in terms of investing in research
and turning research into application than we have been in the
past. We can do that far better if we are teamed together at an
early stage to understand the requirements that potentially the
customer has, as well as of course providing industry with the
opportunity of demonstrating what it has got to offer. I think
the down side is where you do not have something that is explicit
because then it is much more of a free for all and I certainly
think that we could have made on the industrial side much greater
contributions much earlier on in the past and which I hope we
will be able to do in the future.
Q3 Chairman: Was there anything in
it with which you profoundly disagreed and if you could pick one
or two things that you thought, "Hey, that is wonderful,
I am so glad they finally put this in a document", what would
they be? Perhaps Mr Green would start.
Mr Green: There was nothing that
one would say was startlingly new in the Defence Industrial Policy
and that is good news because it means that we were actually working
together in all of the working groups on Smart Acquisition that
led to the creation of the Defence Industrial Policy. If I were
to pick out one thing in it that I thought was really good it
is the recognition that we need to work together to, first of
all, identify risk and then to reduce risk and then have the appropriate
contracting vehicles put in place as that risk is retired together.
Mr Prest: No, there is nothing
we would startlingly disagree with. I think it is worthwhile to
record that the industry was given the opportunity to debate and
discuss the policy as it was being generated by the government
departments and if we disagreed profoundly with some of it we
should certainly have been more articulate at the time. I think
it is reasonable to assume that there was nothing with which we
profoundly disagreed. Aside from the improvements on the Smart
Acquisition process to which my colleague has referred, I think
another key area already touched on by the Chairman of the DIC
is the need to focus our resources on defence R&T expenditure
more effectively in the UK than we have been doing. I think the
history of this is that in the requirement for military capability,
the R&T cycle and the procurement cycle were historically
quite tightly linked in the UK and then really from the 1980s
onwards, with the introduction of a policy of international competition
for individual procurements, the procurement cycle became somewhat
decoupled from the R&T cycle, so the two things were not particularly
well-related, and in the meantime the R&T flywheel in terms
of spending money continued to spin but not as part of an overall
coherent plan related to the capability required in procurement.
You get a sharp focus back on that within government to try and
harness the expenditure more effectively which is explicitly recognised
in the Defence Industrial Policy as a very good step forward.
Sir Richard Evans: I would not
add anything to what has been said, Chairman.
Mr Howe: I would also pick out
what was said about research and technology, the importance of
adequate investment, and the importance of investing sufficient
in exploring technical risk up front in major projects. Those
are really the most important elements of the report. I would
also say from the point of view of someone who works for an international
company, but with a big presence in the UK, we welcomed what was
said—
Q4 Chairman: Did you say you are
an international company with a big presence?
Mr Howe: Yes, the importance of
the contribution that a company makes to the UK industrial base,
and a recognition of the importance of that contribution is something
that we welcome.
Q5 Chairman: Is this document that
was produced the final word on the part of the MoD or do you think
there will be an on-going refinement? Having heard the views of
the defence manufacturers and others might they want to have a
way of putting it rather differently?
Sir Richard Evans: I certainly
do not think that this is the definitive statement on the subject
and I do not think anybody on the MoD side believes that to be
the case either. If we were to believe this is it, it is published,
and you put it into the drawer and that is the end of it, the
whole thing has failed. Unless this remains a dynamic policy document
which is constantly being refreshed as experience is gained out
of the implementation of the recommendations contained in there,
then a lot of us would feel pretty disappointed and to some extent
cheated by it. The first review of the implementation process
is scheduled to take place in October. From the conversations
that we have had with Ministers they share our view on this. We
basically need to see whether this is producing the results that
we all hope it will produce. Frankly, if it does it not, it needs
to be changed. We therefore will certainly be making strenuous
efforts to get changes made to it to make it more effective.
Q6 Mr Howarth: Gentlemen, the Defence
Industrial Policy differentiates between four key factors and
what it calls wider factors that the MoD applies to its procurement
decisions. Were there any surprises for the industry in those
factors selected by the MoD and are there others that you think
should have been included?
Sir Richard Evans: The first answer
is there are absolutely no surprises. We were pretty familiar
with the whole of the content of the document before it was published.
I think there were one or two questions ahead of time regarding
content in some areas that were taken into account but there certainly
are no significant issues with the specifics that you have raised.
I think it is perfectly possible, as we gain some experience from
its implementation, we may seek to either change or to modify
these in some way, but as a starting point all of us pretty well
accept that this is a reasonable position to be in. As I said
earlier, the selection of those items is not a surprise to us.
Q7 Mr Howarth: For the benefit of
some of us who may not know what those four factors were, they
are, firstly, the cost and operational effectiveness, secondly,
affordability, thirdly, long-term value for money, and finally,
national security issues which arise. There are none others, although
they are pretty broad. There is a further issue which the policy
paper did set out which was wider factors to be taken into account
in acquisition decisions, Table 2 of the Government's paper, and
I wonder whether the fact that the Ministry of Defence declared
at the outset that these wider factors would be relevant would
make a real difference to industry. Some of them are quite interesting—security
of supply, key technologies, industrial participation, industrial
capability. These are a huge range of other factors. Where is
the balance going to be, gentlemen, between the four key factors
and those other, some would argue, even more important factors?
Mr Prest: I think it would be
difficult to derive a mathematical model that would enable integrated
project teams in an organised way to take account of too wide
a range of factors. The way that this works in practice is that
individual IPTs in the MoD come up with an initial decision business
case and that will normally reach a recommendation based on the
first four factors but will be careful to highlight the other
factors so that they can be brought to the attention of people
further up the authorisation chain in the MoD. Where there are
sensitive issues of technology, of exports, of industrial capacity,
of employment, I think it is fair to say that in our recent experience
and taking account of the way the policy has been articulated,
we would expect those to be well brought out in the business case
for senior officials in the MoD and Ministers and for decisions
to be taken accordingly. To ask the procurement executive at the
IPT level to frame its initial recommendations across too broad
a range of factors would be really giving them a very difficult
job.
Sir Richard Evans: I think that
Liz Symons pretty well summed this issue up at a very early stage
when this debate on industrial strategy began when she was responsible
for MoD procurement. Liz, I think quite rightly, made the point
that there are wider issues that we all have to recognise in the
context of decision taking on procurement that go beyond the very
narrow application of assessment that in this particular case
the IPT leaders will actually make. These are the obvious issues
of security, employment, capability, retention of skills, amongst
a whole lot of others. Liz made the point, which does not actually
come out in clear terms in the policy paper but nevertheless I
think many of us understand, that it would be much better for
these issues to be dealt with as early on in the review process
as is possible, rather than allowing the whole process to continue
towards something of a conclusion at which point there is a huge
amount of effort devoted in order to bring these issues out into
the open in terms of influencing the outcome of the decisions
one way or other. I am not saying as an act of last resort that
position will not continue to pertain, but I certainly believe
it will be much better for everybody if indeed these wider issues
were clearly understood, openly debated, and taken into consideration
before industry and the MoD expend huge amounts of money on going
down the track that might ultimately produce a result that when
these wider issues have been taken into account makes a lot of
that expenditure quite nugatory.
Q8 Mr Howarth: In a sense what you
are suggesting is that there is no real clarity as a result of
this policy. If I can take one example that affects your company
in particular, and that is the Hawk Advanced Jet Trainer programme,
surely there is a case, is there not, where the government is
going out to competition but you might argue—and I lay my
cards on the table I would argue—that these wider factors
ought to be taken into account? If the British government decides
not to choose the Hawk 128 as the advanced jet trainer, that would
probably kill that aircraft in further export markets, would it
not, so where is the policy?
Sir Richard Evans: I think that
that is a reasonable conclusion to which you can come, but I would
say with regard to the selection process to date that we are at
a very early stage in the context of this programme. Indeed, I
am pretty certain that the bid that we submitted went in only
as recently as the end of March, and clearly that bid has to be
provided in a way that creates a conformity with the requirements
and alongside that bid we ourselves are driving what we believe
is the correct definition of the wider interests in support of
the bid that we have put in. If that in fact in terms of the review
process subsequently proves not to be taken into account in an
effective way that protects the wider UK interest, obviously including
our own interest, that would be a matter of great importance to
us. I do not believe at the moment insofar as the advanced jet
trainer is concerned that we have got far enough down the road
where you could rightly say that we ought to be doing something
that is different to what is being done. I think we are rapidly
approaching that point. I think it is generally known to the Committee
that we have had to take steps specifically to protect our legal
position in terms of the wind down of employment in regard to
Hawk, and that gives emphasis to the point that you are making
that indeed if this decision were to go against us there would
be some profound industrial positions, but at the political level
certainly these positions are well understood.
Q9 Mr Howarth: So would you suggest,
not just in this project but as a general principle, that to put
flesh on these bones what the Government should say in respect
of each programme is, "Here are our four key issues which
are based on affordability and value for money, but we want to
tell you at the outset that we also see that these wider factors
apply, A, B and D, and those will apply in this project."
Is that what you are saying? Perhaps the others could comment
as well.
Sir Richard Evans: I am certainly
subscribing to that sort of view. I think the advanced jet trainer
requirement has some peculiarities to it. If you look at the success
of this programme worldwide and the numbers of aircraft therefore
that we have sold in the context of worldwide competition my view
would certainly be we have pretty adequately demonstrated competitiveness
both in terms of the capability of the project and clearly the
price we sell it for, including, if I may add, selling this aircraft
into the most difficult market in the world which is North America.
Q10 Chairman: I thought you were
going to say France then! It is 25 minutes and I have not tortured
you yet. I think you have done pretty well today.
Sir Richard Evans: We travel in
hope. The Alpha Jets do need to be replaced.
Q11 Mr Howarth: We are coming on
to market access later.
Sir Richard Evans: I think that
the Hawk in the context of demonstrating its competitive position
in the market place, which is an issue ultimately for the customer,
is not the best of examples to test competition law. If you were
talking about carriers, for instance, which we do not produce
every day of the week, that is quite a different issue. My argument
would certainly be that we have got a pretty good proven track
record and we have competed in the toughest markets in the world
successfully so do we need to demonstrate our competitive position
with the product?
Q12 Mr Howarth: What about the others,
Rolls-Royce and Thales?
Mr Green: Clearly on that particular
project Rolls-Royce has an interest as well.
Q13 Mr Howarth: It is called the
Adour engine and you have upgraded it.
Mr Green: Which is a collaboration
with France! I think the real point, just moving above the projects
for a minute, is pretty well what the Chairman of the DIC said
when we started—the whole issue here is the implementation
of the DIP. The projects we have in front of us at the moment
are indeed that very first test bed where we can see how well
the DIP is going to be implemented. I think the really positive
side of the DIP is that these wider factors are explicit and it
is now incumbent on the IPT leaders to give explicit recognition
to them, whereas previously, as Nick said, it was a bit ad
hoc. Now it is required that those wider factors are explicitly
considered and form part of the decision-making process.
Q14 Mr Howarth: And competition for
the new main battle tank?
Mr Prest: It is nice to feel that
there will be a new battle tank in the near future. It is probably
not an issue that will come up for many years but it should be
addressed on its merits, I would say. Certainly from an Alvis
perspective, we have supplied a very large proportion of the commitment
currently used by the British Army. I think when the record comes
to be studied it will be apparent that certainly it has done extremely
well in the recent campaign, which is a tribute to its design
and to some of the modifications that the customer has put into
it with this explicit purpose in mind. We would like to feel that
we would be very well-placed to fulfil future requirements of
that sort in the British Army. To argue a blanket point of view
that competition is always wrong is certainly not the industry's
position at all. Our position is that competition has to be applied
intelligently. A tenet of the Defence Industrial Policy is really
to recognise that. If I can quote, picking up your specific point,
this is a document that is on the public record, it is the guidance
that MoD has issued to its own IPTs on this issue: "The wider
factors will need to be identified, analysed and understood at
the beginning of any acquisition activity and their impact reflected
in any tendering process. It will be necessary to review and present
these facts at all decision points throughout the life of the
programme." That is the actual guidance which has come out
from the Defence Industrial Policy being pushed down to its IPTs,
so I think we can all take some encouragement from that.
Q15 Mr Howarth: You can leave that
document behind because we have not seen it.
Mr Prest: It is accessible on
the MoD web site.
Q16 Chairman: That is why nobody
sees it!
Mr Howe: The points I would make
have all been made. We would certainly see competition as having
a very important place in the tool kit. As I said earlier, we
would certainly welcome what the strategy has to say about the
importance of taking into account a number of factors, including
the health of the industrial base. We certainly support the argument
which was put to us that the more explicit the criteria are at
the beginning of the competition the better and more fair and
the more sensible the result is going to be. I think the fact
that we now have an explicit published Defence Industrial Policy
which has been followed up by guidance, about which industry was
consulted, to those concerned in taking procurement decisions,
is very helpful.
Q17 Chairman: You have all been in
competitive environments. Are these guidelines which are to be
taken into account found in other countries? Do you know when
you embark on a competitive process that the playing field is
fairly level, very level? When you try to export to the United
States what line do they take in informing you beforehand which
of the criteria will be taken into account by the Department of
Defense before they make a decision?
Sir Richard Evans: The playing
field is absolutely not level. It varies from country to country
but certainly in the context of the US the Buy American Act provides
certain protections. It is extremely difficult to compete on equal
terms unless there is some clearly definable and recognisable
technological difference in the product that is being offered,
and I think the same applies in Europe as well. The fact of the
matter is here in the UK—this is a point we have made repeatedly
to government—we are probably the only country, certainly
in terms of the western world, that has a pretty much open (although
there may be one or two highly restrictive areas probably relating
to nuclear capabilities) position in the context of bidding and
tendering, and that absolutely and definitely is not reciprocated
by any of the other markets that we go into. As a result of that
you have only got to look at the success rate that we have had
in these markets, in my particular case in the context of BAE
SYSTEMS where although we have been up until recent times successful
in America it needs to be looked at in the context of the total
amount of spending that the Americans put in. We have been successful
and things really are relatively big by our standards, but by
American procurement standards they are absolutely tiny. We have
been much more successful in the context of success from within
America and the fact of the matter is that there is not a level
playing field and it is one of the issues, as I say, over which
we have continued to chide the government, and I think at some
stage, unless there is some sort of reciprocal opportunity offered,
there are some serious questions to be asked.
Q18 Chairman: Has this document appeared
to be infectious in the sense are there signs that others are
saying, "This is very good, we should follow the line the
British have taken", or do they see it as amiable eccentricity
hell bent on making life difficult for British companies?
Sir Richard Evans: There is certainly
no evidence to my knowledge to suggest that there have been any
other countries picking this up and saying what a great idea this
is and we must follow suit. I have to say that one of the things
I think this document has done here in the UK has been to re-energise
a campaign at both political and official level in the context
of some of these markets to try to address the issues of non-reciprocal
arrangements. The extent to which that is likely to be effective
remains to be seen, but it is a really significant issue.
Chairman: Yes, it would certainly encourage
us to be more supportive of this kind of policy if we could see
that British companies were having a fair crack of the whip elsewhere.
If they are not, then perhaps people will feel rather reticent
about giving it their approval. We will come back to this later
on.
Q19 Mr Cran: Very neatly handed over
because the Chairman just used the expression "British companies"
and of course the document to which my colleague referred, the
Defence Industrial Policy, thought it fit and important enough
to give a definition of what is a British company, i.e., in terms
of where technology is created, where skills and intellectual
property reside, where the jobs are, and where investment is made.
Is this a definition that resonates with all of you or not?
Sir Richard Evans: I think it
is. There has been a debate which clearly all of us are aware
of about what constitutes a British company. The fact of the matter
is today in terms of the mobility of capital, it is very difficult
at any one particular time to know who precisely holds what. There
are clearly broadly understood definitions of ownership in capital
terms but they do not relate specifically to capital. I think
the definition used in there is one we can certainly all accept.
There are differences—
| 
